Fund mgmt fee.........1% of what?

When you hear of a fund taking a 1% or 1.5% management fee what is this a percentage of?

- The profit made by the fund that year?
- The entire fund regardless of whether it's in profit or not?

If the second it hardly seems credible......

1% of the full value of the fund normally charged daily - i.e. c. 1%/365 reduction in the value of each unit of the fund to cover this cost.

Why is this not credible? Remember that the better the fund performs the more remuneration for the fund managers.

Yes, the 1-1.5% is of the value of the fund, whether it has gone up or down or whether it has under or over performed it's peers or benchmark. Investors who don't like this usually prefer index funds, no active management and hence lower costs.

The annual management fee on an index tracker may be lower than some actively managed funds but it is deducted in exactly the same way.

ClubMan said:

Why is this not credible? Remember that the better the fund performs the more remuneration for the fund managers.

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I agree with incentivisation, Clubman. I'm not convinced that 1% of the entire fund is the best way to create it, though.

Suppose a fund makes little or no growth in a given year. The fund managers still take 1% of millions.

Perhaps a percentage of that year's profits would be a fairer incentive?

Well that's the way most if not all funds are charged globally as far as I know.

Clubman
A few investors do negotiate management fees dependent on performance - certainly in the UK and the US. Usually large pension funds or endowments. Fees often over a three year rolling period. I am always suprised more institutions don't demand fees based on performance. Usually structuted so that full fee is paid if manager hits performance target - maybe benchmark + 1% pa.

The whole hedge fund industry tends to charge management fees based on performance too. However hedge funds generally take 1% to 2% of Funds under management regardless of performance. Performance fee often 10% -20% of positive return!

I have Never heard of any retail funds that have fees based on performance.

I was referring to retail funds and average punters.

hedge funds charge management fees based on assets in addition to performance fees. this is the so called 2 & 20 rule - 2% annual management fee + 20% of the performance (though these fees are under pressure).

it costs a lot of money to run a fund management operation. it is really only possible to forego management fees if you have a mandate that allows you to take a reasonable degree of risk, otherwise you are unlikely to generate enough outperformance to compensate for having no management fee.

i think that New Star asset management may not charge management fees to some of its institutional clients but I don't know of anywhere that a retail investor can get a similar deal short of managing your own money.

JohnBoy said:

it costs a lot of money to run a fund management operation. it is really only possible to forego management fees if you have a mandate that allows you to take a reasonable degree of risk...

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Even if all you're doing is index tracking, like QL or others?

If you don't like the 1%, why not invest in an ETF, which in some cases may work out 'cheaper' than a fund, or else build your own portfolio using discount online brokers and a 'buy and hold' strategy?

AlastairSC said:

When you hear of a fund taking a 1% or 1.5% management fee what is this a percentage of?

- The profit made by the fund that year?
- The entire fund regardless of whether it's in profit or not?

If the second it hardly seems credible......

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1% to 1.5% and above is most definately credible. Fund managers demand high salaries and tend to reside in high expense cities such as London, New York, Tokyo, Hong Kong. Then there's the back office settling, reporting and accounting requirements not to mention trading infrastructe. It's a high cost and high profit industry and always has been.

As has been pointed out EFT's can offer a cheaper fee than managed funds. Other than that buy your own individual equities. I bought my own Irish equities but not European, Asian, etc. I simply don't have the time to do the research and monitor them. The cost for me to do that would be far greater than the 1-1.5% fee. But your call I guess.

Also If you really want the unregulated Hedge Fund industry tend to charge based on profit. However I believe they take 15% + of the profit plus they have a tendancy to over stretch and go bust with client's funds as seen over the last year in the US.

Even if all you're doing is index tracking, like QL or others?

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Well they're not charities - they have to make some money. After QL pay the management charges on the ETFs or whatever backs up their funds, they're probably left with .5% or so. Even if an investor has 10K of funds that only leaves QL with 50 quid a year. From this they have to sustain their business costs.

If you have 50k or more invested, then you can look at buying the equivalent ETFs where you're "annual management charge" will be called a TER and might be .5% instead of 1% - saving you maybe 250 a year. However you'll also have trading charges and brokerage charges (since I think all ETFs are electronically traded exclusively) and you'll have tax issues; for example, you'll have to pay 47% of the quarterly dividend (if you're on the higher tax bracket) as income tax/PRSI/health levy instead of it being "rolled up" into the fund. You'll also have to file a form 12 at the end of the year. The exercise might only break even for you with 100s of grand albeit you'll have a far greater choice of fund.

So I don't begrudge an financial institution charging 1% (if it's total) a year. Even in the states which is a fiercely competitive market, the best you can do is maybe .75%.

I've got 0.625% on some Irish funds on a special deal. Unfortunately I can't say more...

The main distinction, as I understand it, seems to be between actively managed funds and those that simply track indexes. I completely understand robd's points about the complications, skill levels and costs but I just can't see why more humble offerings that simply track indexes (indices?) must charge on the same basis. Taking the QL example, even if they in turn pay charges on ETFs or whatever underlies their fund, as a previous poster says, how is it any more than just repackaging? Where does the skill come in that merits taking a percentage of the entire (enormous) fund each year, rather than just the total gain made each year.

Would it be a fair analogy to compare it to a situation where Govt tax on SSIAs was on the entire fund rather than the gain made? (Ignoring the rate, it's the principle I want to consider.)

I wonder if just to say this is the way it's always done isn't a little inadequate on a forum such as this, when one of its major advantages is to critique, analyse, justify etc and generally to be constructively critical of how things are done, particularly when debate has regularly achieved better deals....

Pricing is ultimately down to the supplier, if enough people object, they may change their policies.

For example, many solicitor fees are now quoted as a flat fee, where the norm used to be a % of the property value (not any gain or loss made thereon).

On the other hand, EA fees are generally still quoted as a % of property price (not gain on sale).

To use another tax example, stamp duty is levied on the full value of your property, with no allowances given.

But % of gain made is not a sustainable method of pricing for an index tracking fund manager like QL-if their mandate is to track an index and that index falls in value for 5 years, then how are they supposed to make money? As long as they are tracking the index, surely they are 'doing their job' and deserve to be paid?

If they (QL) charge a flat fee, then you could find yourself paying more in years where the fund is losing money than you would if you were paying a % of total fund value basis.

What is a 'fair' % to pay? 0%? 0.1%? etc. It's fairly subjective.

Thanks CCOVITCH for that considered reply.

CCOVICH said:

As long as they are tracking the index, surely they are 'doing their job' and deserve to be paid?

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Absolutely, and at proper rate for the job, just like an accountant, AA etc. A flat or agreed fee for a competent service.

CCOVICH said:

If they (QL) charge a flat fee, then you could find yourself paying more in years where the fund is losing money..

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Surely a flat fee is just that, separated from the fund performance, payable come what may?

If funds that input no active management all charged flat fees it would become very transparent! We could then compare them by efficiency/productivity/type of underlying etfs etc... or is this too simplistic? Naturally managed funds would continue to compete on performance/reputation, just as at present.

Gives one furiously to think! Maybe I'll start a campaign....

AlastairSC said:

I wonder if just to say this is the way it's always done isn't a little inadequate on a forum such as this, when one of its major advantages is to critique, analyse, justify etc and generally to be constructively critical of how things are done, particularly when debate has regularly achieved better deals....

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I thought I did a bit more? I explained why the service which you think is trivial is actually very valuable to investors unless they have hundreds of thousands and can afford professional tax advice - to avoid losing half their dividends and perhaps to deal with the paperwork revenue requires if you hold ETFs.

I also explained how the margins are pretty thin for QL. They might be making 1 million from every 200 million of funds banked with them and from this they have pay the expenses of running a business, which in a highly regulated market like financial services is not the sort of operation you can run from a garage. They're not milking juicy profits given that they remain better value than many of the new entrants into the market such as rabobank. Contrast this with what happened in the mortgage market once foreign competition entered the market.

In other words, I don't know why you're getting indignant?? They offer a valuable service on extremely thin margins. I can't even see how they could build a business model on a flat fee basis since the underlying ETFs don't charge that way. And if they tried to manage an index fund themselves the trading costs for a relatively small fund would murder performance.

Vanguard also offer Irish investors very low charges, however a minimum initial investment of €100,000 excludes most people:

See here and here as an example - costs of 0.5% and 0.38% respectively for their European and S&P 500 index funds.

I have no connection, other than being envious of how competitive other markets are compared to Ireland! Far be it from me to suggest that it is possible that the likes of Quinn etc. merely invest their clients' monies in Vanguard's institutional funds and pocket the difference in fees charged .

I have no connection, other than being envious of how competitive other markets are compared to Ireland! Far be it from me to suggest that it is possible that the likes of Quinn etc. merely invest their clients' monies in Vanguard's institutional funds and pocket the difference in fees charged

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Well it's really only what's available in the US that makes me envious; nowhere else in the world comes close - even in the UK 1% is typical of index trackers. The competition is fierce in the US. Apparently Fidelity, for example, sell their index trackers at a loss to attract customers for their managed funds.

Having said that even in the US if you want trackers of anything more exotic than plain trackers of the standard US indexes, the TERs go up. Even Americans pay high TERs for Euro or UK trackers.

When you're talking about a small market like Ireland, where people are far less interested in such investments anyway and the considerable fixed costs of doing business here, I can't see us ever having access to what they have in the US. For example, it seems Standard Life have killed off their 1% management fee index tracking funds (for PRSAs) - presumably because they did the numbers and came to the conclusion that unless they sold tens of thousands of such policies, they'd never make money at them.

UCITS are a step in the right direction from the EU but I suspect it'll be years before we have a single market for basic financial products in Europe. A Europe wide market for mutual funds would probably make it feasible for companies to offer US style value here.