2.2 Fees – a small price to pay

feesChapter Overview

The average cost of owning a mutual fund is 3.17% pa

Fees

I actually do have a small pension pot – which is in a fund of funds with Old Mutual Wealth.  In my last statement I saw 6 month fees of £48 on income of £196 – so 24.4% of growth went in fees.

Compared to the (current) fund value of £83K, that equates to just 0.12% BUT, as this is a fund of funds, it’s not easy to see what the underlying funds are costing me to own.  So, I looked them up individually on Morning Star – all 22 of them.

Here they all are: past | future | initial % | ongoing %

Funds out-performing their category and benchmark

  • Average initial fee 3.95%
  • Average annual fee 1.64%
  1. Aberdeen Emerging Markets Equity Acc
    5 star | gold | 2% | 1.97%
  2. AXA Framlington UK Select Opportunities R Acc
    5 star | gold | 5.25% | 1.58%
  3. First State Asia Pacific Leaders
    5 star | gold | 4% | 1.55%
  4. First State Global Listed Infrastructure
    4 star | silver | 4% | 1.59%
  5. Henderson European Growth Acc
    4 star | none | 5.25% | 1.70%
  6. Invesco Perpetual Global Equity Income Acc
    5 star | neutral | 5% | 1.68%
  7. Invesco Perpetual Monthly Income Plus Acc
    5 star | silver | 5% | 1.43%
  8. Neptune UK Mid Cap Acc
    5 star | none | 5% | 1.66%
  9. Newton Asian Income
    5 star | silver | 0% | 1.64%
  10. Standard Life Global Absolute Return Strategies Acc
    none | none | 4% | 1.59%

Funds performing similarly to their category and benchmark

  • Average initial fee 0%
  • Average annual fee 1.14%
  1. M&G Index-Linked Bond A Acc
    4 star | none | 0% | 0.66%
  2. Newton Global Higher Inc
    4 star | silver | 0% | 1.62%

Funds under-performing their category and benchmark

  • Average initial fee 3.63%
  • Average annual fee 1.57%
  1. AXA Framlington American Growth Acc
    3 star | bronze | 5.25% | 1.57%
  2. BlackRock European Dynamic FA Acc
    0 star | silver | 5% | 1.68%
  3. Invesco Perpetual High Income Acc
    4 star | none | 5% | 1.52%
  4. JPM Natural Resources A Acc
    2 star | bronze | 3% | 1.68%
  5. M+G Global Basics X Acc
    2 star | neutral | 0% | 1.68%
  6. M&G Recovery X Acc
    2 star | gold | 0% | 1.65%
  7. M&G Strategic Corporate Bond A
    4 star | gold | 3% | 1.16%
  8. Neptune US Opportunities Acc
    3 star | bronze | 5% | 1.65%
  9. Troy Trojan Acc
    2 star | none | 5% | 1.57%
  10. Troy Trojan Income Acc
    2 star | none | 5% | 1.57%

A few observations

The number of funds out-performing the market is identical to those under-performing it.

I paid an average of 3.79% across all funds to just get started.  That reduced my initial £65K pot down to £62.5K on day one.

Adjusted for inflation, the equivalent buying power of £65K in 2007 is £82K today.  My pension pot has just about kept up with inflation. According to this calculator, my average compound growth rate has been a measly 2.21%.

Taking an average total fund value over the years of £71.5K, I’ve been paying an average of 1.45% in management fees pa – a little over £1,000. That’s ignoring Old Mutual Wealth’s platform fees too.

Over the 7 years I’ve owned this fund, I could have saved the £2.5K of entry fees and reduced the management fees by about 60% by using a low-cost index tracker fund.

If I had done this, I’d be up approximately £7,000 – enough to bring the current pension pot value to £85,000 – ahead of inflation.

What’s more, taking the FTSE All Share Index as an example, over the same period, my £65K would have grown to around £90K.  Not phenomenal – but better than than this expensive-to-enter and expensively-managed collection of funds has produced.

As soon as I know what I’m going, I’ll be transferring this pension pot into a low-cost tracker fund.

Basis points (bps)

1 basis point = 1/100th of 1%.  BPS is used to denote the change in interest rates, equity indexes and the yield of a fixed-income security. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point. So, a bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points.

No-load Mutual fund

A mutual fund in which shares are sold without a commission or sales charge. This is the opposite of a load fund, which charges a commission at the time of the fund’s purchase, at the time of its sale, or as a “level-load” for as long as the investor holds the fund.

Because there is no transaction cost to purchase a no-load fund, all of the money invested is working for the investor. For example, if you purchase £10,000 worth of a no-load mutual fund, all £10,000 will be invested into the fund.

If you buy a load fund that charges a front-end load (sales commission) of 5%, the amount actually invested in the fund is only £9,500. If the load is back-ended, when shares of the fund are sold, the £500 sales commission comes out of the proceeds. If the level-load fee is 1%, your fund balance will be charged £100 annually for as long as you own the fund.

In reality, there are other fees which take a chunk out of owning any mutual fund.  The no-load name only applies to transaction costs.  The book does a good job of listing the potential fees on page 113.