# Sunday Times "funds cream half investor profits"



## KOW (7 Jan 2018)

The above article focuses on Friends first Irish Commercial property fund stating the fund typically wipes 3.35 percentage points a year from performance off the return of 7.46% since 1984.
It also states that Zurich lifes Dynamic fund  would trigger charges of 4300 euro on a 10k investment over seven years an annual drag of 3.35%.

Add tax on profits and it is just mind boggling.

The argument for direct investment by learned posters on this site can not be over stated.
Only in Ireland.


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## aristotle (7 Jan 2018)

My occupational pension fund is in that Zurich fund and the charges are listed as 0.6% on my Zurich portal. 

So either that is wrong or the above 3.35% is ?


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## Dan Murray (8 Jan 2018)

Hi Aristocle,

This might be one of those apples v. oranges comparisons.

The charges on your pension are the fund management charges whilst the charges in the article are presumably all charges. SBarrett discussed this a few days ago on this link - https://www.askaboutmoney.com/threads/behind-the-pripss-curtain.206606/


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## Sarenco (8 Jan 2018)

DCD said:


> The above article focuses on Friends first Irish Commercial property fund stating the fund typically wipes 3.35 percentage points a year from performance off the return of 7.46% since 1984.


That article is misleading in a number of respects.

The 7.46% figure is the (self-reported) annualised return on the retail institutional fund class (gross-roll up) of their Irish commercial property fund from March 1984 to October 2017.

The 3.37% figure represents the projected impact of investment costs on the projected return (moderate scenario) on the same fund under a particular investment plan.

In other words, the article confuses:

Different products;

Gross and net figures; and
Projections and historic returns.
It's not comparing apples to apples – it's comparing oranges to bananas!

Links to the relevant documents:-
https://www.friendsfirst.ie/wp-cont...-Irish-Property-Quarterly-Customer-Report.pdf
https://www.friendsfirst.ie/wp-content/uploads/active/Active/FUND_ZSSS360_606.pdf
https://www.friendsfirst.ie/wp-content/uploads/PRIIPs-KIDS-and-Friends-First-QA.pdf


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## RobFer (8 Jan 2018)

Sarenco said:


> That article is misleading in a number of respects.
> 
> The 7.46% figure is the (self-reported) annualised return on the retail institutional fund class (gross-roll up) of their Irish commercial property fund from March 1984 to October 2017.
> 
> ...


From the figures can you calculate the historic expense ratio?


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## Sarenco (8 Jan 2018)

RobFer said:


> From the figures can you calculate the historic expense ratio?


No, I'm afraid not.

As an aside, I think it's extraordinary that the Central Bank does not require life companies to disclose this information.  In my opinion, the lack of transparency when it comes to the cost of unit-linked life products is a huge failure of our regulatory system.


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## Dan Murray (8 Jan 2018)

Sarenco said:


> .....is a huge failure of our regulatory system.



Arguably, another huge failure of our regulatory system?


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## cremeegg (8 Jan 2018)

Dan Murray said:


> This might be one of those apples v. oranges comparisons.



It hardly matters wether it is apples or oranges if you must pay for both.


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## cremeegg (8 Jan 2018)

Dan Murray said:


> The charges on your pension are the fund management charges whilst the charges in the article are presumably all charges. SBarrett discussed this a few days ago on this link - https://www.askaboutmoney.com/threads/behind-the-pripss-curtain.206606/



I don't consider my self either stupid or uneducated but I didn't understand a word of that thread.

I know you guys were trying, but it can't be that complicated.


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## Dan Murray (8 Jan 2018)

cremeegg said:


> It hardly matters wether it is apples or oranges if you must pay for both.



You're right and a bit left - other fish to fry right now - hopefully Sarenco will have time to explain; otherwise, I'll try address properly later.


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## Sarenco (8 Jan 2018)

cremeegg said:


> I don't consider my self either stupid or uneducated but I didn't understand a word of that thread.


I'll have a shot at explaining the different terms but I'm afraid it does get fairly complicated.

The stated annual management charge (AMC) for a fund is simply the fee paid to the fund manager, out of the fund assets, on an annual basis (normally expressed as a percentage of a fund's net asset value per unit).  However, a fund will bear all sorts of other operating and trading costs that are not reflected in the AMC.

The Total Expense Ratio (TER) of a fund is equal to the ratio of the fund's total operating costs to the average net asset value of the fund during the preceding financial year.  So, a fund's TER incorporates its AMC but also includes other operating costs (legal, audit, custody, etc.).

However, notwithstanding the name, a fund's TER does not reflect the full ownership costs of holding a fund.  In particular, it does not capture portfolio trading costs (currency conversion costs, brokerage costs, stamp duty, etc.).

To all intents and purposes, a fund's Ongoing Charges Figure (OCF) is essentially the new name for its TER (there are some technical differences but these are unimportant for these purposes).  If you look at the Key Investor Information Document (KIID) for any UCITS fund, it will give you the fund's OCF.

So far so good?

The new EU regulations discussed on the earlier thread require a Key Information Document (KID) to be made available to investors in packaged retail and insurance-based investment products (PRIIPs).  Importantly, certain pension products are exempted from the requirement (as are UCITS funds until 2019).

The PRIIPs KID is similar in many respect to a UCITS KIID but there are important differences.  In particular, the impact of investment costs on an investor's projected return is expressed as a projected reduction in yield (RIY) figure (as opposed to the OCF discussed above, which is based on historic operating costs/NAV and excludes trading costs).

The methodology for calculating the projected RIY is relatively complex but, importantly, the figure aims to give potential investors a true and fair view of the projected impact on the projected returns of a fund of anticipated (a) operating costs; (b) distribution costs; and (c) portfolio trading costs.

Hopefully that helps.


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## Gordon Gekko (8 Jan 2018)

Hi Sarenco,

At present I have a reasonable sum invested in an Irish Life global equity fund. I’m paying an AMC of 0.45%. I’ve always thought that the TER would be circa 0.6% on the basis that Irish Life would have serious institutional purchasing power in terms of trading costs. Am I wrong/naive? There is no broker or intermediary involved.

Many thanks.

Gordon


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## Sarenco (9 Jan 2018)

That's looks like a reasonable estimate Gordon.

It's also probably reasonable to add another ~0.15% to the TER to capture portfolio trading costs (assuming the fund is actively managed).

Ballpark estimates, obviously.


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## cremeegg (9 Jan 2018)

Thanks Sarenco for that. I must bookmark the post.

Just a few points that throws up. 

Are marketing costs included in the AMC.

Is the RIY affected by the projected return. If there is a fixed element in the costs I would expect the RIY to be higher at a low projected return. Does that make sense.


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## Sarenco (9 Jan 2018)

cremeegg said:


> Are marketing costs included in the AMC


No, distribution costs (intermediary commissions, platform charges, etc.) wouldn't fall within the scope of the AMC.


cremeegg said:


> Is the RIY affected by the projected return


Yes, the RIY is calculated on the basis of the moderate scenario, over the recommended holding period, indicated in the KID.  Funds with different returns over the same holding period will exhibit slightly different figures for similar costs.


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## Steven Barrett (10 Jan 2018)

cremeegg said:


> I don't consider my self either stupid or uneducated but I didn't understand a word of that thread.



Perfectly understandable, the more I look into this, the bigger a mess the whole thing is. 

Standard Life don't include the 1% government tax as an entry cost but the other companies do. 
Some insurance companies assume 100% allocation with a 3% advisor set up fee and 0.5%. Other companies are investment contract specific while another assumes an allocation of 95% (they are redoing their assumptions as their costs are way higher!! ).
Another life company is not showing costs for the use of external fund managers. 

The basis for the KID document was to allow people to compare the costs of different funds with different life companies. The fact that the companies do not put the assumptions used on the document means you are looking at headline costs that may not actually apply at all. 

I have spoken to some people in life companies and they have all expressed frustration at this document and how far removed from reality these figures are. 

The regulations laid down to MiFiD firms is a lot clearer and easy to understand than this mess. 


Steven 
www.bluewaterfp.ie


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## KOW (10 Jan 2018)

I invested 200k a sizeable amount to me through a crowd called Liberty Asset management back in 2007. Today it is worth 204k.
It is with New Ireland currently in their evergreen fund. The current AMC charge is stated at 1%.
I will be closing off fund over the coming weeks and investing directly due to the dismal performance and charges i dont understand or have control over. 
Cold anyone offer a rough idea what the actual charges per annum are on such a fund.
 Also a small number of units are added to the fund each month. I phoned and spoke to an agent in New ireland and all they could say was that this was the structure set up with the broker at the start of the policy--no detail. 
Could anyone explain in simple terms? 
Cheers.


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## Steven Barrett (11 Jan 2018)

DCD said:


> I invested 200k a sizeable amount to me through a crowd called Liberty Asset management back in 2007. Today it is worth 204k.
> It is with New Ireland currently in their evergreen fund. The current AMC charge is stated at 1%.
> I will be closing off fund over the coming weeks and investing directly due to the dismal performance and charges i dont understand or have control over.
> Cold anyone offer a rough idea what the actual charges per annum are on such a fund.
> ...



It is impossible to know. The Reduction in Yield (RIY) that is now required on investments is a forward looking assumption of charges. They may or may not prove to be accurate. 

The Ongoing Charges Figures (OCF) is backward looking and details the cost of the fund in the previous last year. Life companies do not disclose the OCF. 

If you are getting units added to your fund each month, I would get in touch with Liberty and ask them what charging structure you are under as it sounds like an expensive one. You also bought into a fund with heavy property weighting at near the height of the market so you would have taken a massive hit but it should have recovered somewhat since then. The deemed disposal would also have been taken from your fund. Do you know how much that was? 


Steven
www.bluewaterfp.ie


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## Duke of Marmalade (11 Jan 2018)

Sarenco said:


> Links to the relevant documents:-
> https://www.friendsfirst.ie/wp-cont...-Irish-Property-Quarterly-Customer-Report.pdf
> https://www.friendsfirst.ie/wp-content/uploads/active/Active/FUND_ZSSS360_606.pdf
> https://www.friendsfirst.ie/wp-content/uploads/PRIIPs-KIDS-and-Friends-First-QA.pdf


_Sarenco _that is a very helpful introduction to PRIIPS.  Now what I am going to say is no criticism of FF but it seems to me that this PRIIPS stuff has really lost the plot, unless I am reading it wrong.

It tells me that the adverse scenario over the next 7 years is 9.43% p.a.  My read of that is that it is estimated that in 90% of outcomes you can expect to earn at least 9.43% p.a. after all charges.  If I believed that I would mortgage the chateau to get a piece of it.

But FF are merely following the rules.  The return over the last 5 years is 12.29% p.a. and with an SRI of 2 its volatility is less than 5% p.a.  So yes using the prescribed statistical model I can see why you would get that it is *9/1 against earning less than 9.43% p.a. after all charges over the next 7 years*.

But the return over the last 10 years is -5.4% p.a. and the return over the last 15 years is 1.73% p.a. and 1984 7.86% p.a.

Finally describing a unit linked property fund as low risk seems crazy to me.

PRIIPS is the sort of EU nonsense that makes you think Brexiteers aren't all wrong.


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## Sarenco (11 Jan 2018)

Hi Duke

Yes, it was widely predicted by asset managers that the PRIIPs methodology, particularly in relation to performance and costs, would only serve to confuse and mislead investors.

Having said that, it does at least have the merit of highlighting (however imperfectly) the impact of costs on return. 

I don't have much sympathy for life companies that have offered investment products with opaque charging structures for years.  If the RIY figure is misleading, well, give us the funds' OCF and we can make up our own minds!


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## Duke of Marmalade (11 Jan 2018)

_Sarenco _I downloaded this sample [broken link removed].  I think it is only a sample, but it gives "reasonable" outcomes of -1% in the 10th percentile, 3% in the median and 6% on the 90th percentile, all after charges of 1.90%. The FF equivalent figures are 9.43%, 11.69% and 14.30%.  And that is after charges of 3.37%.

I can imagine an unscrupulous broker (if such exists) making a meal of the message that there is only a 10% chance you would earn less than 9.43% p.a.


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## Duke of Marmalade (11 Jan 2018)

_duplicate_


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## Monksfield (11 Jan 2018)

Yes, the PRIIPs regulations which were supposed to bring the nth degree of transparency to charges has failed, and fairly miserably. It required the regulator to be very prescriptive - the life companies have interpreted what is required in different ways, with even those going the same route making different assumptions. The most interesting figure to me is the *Other Ongoing Costs* figure. I know from speaking to some of the companies that this contains what people would know as OCF under the UCITS regs - this is very similar to TER, as generally understood - the major difference is the treatment of performance fees.

Unfortunately OOC also includes an assumed figure in respect of the trail commission which many advisors could receive under certain product/commission options. I gather that the amount typically built into the OOC figure is *0.5%* or *0.75%*. So what is needed to get to OCF/TER is disclosure of this other element. The 'trail commission' assumption is also a significant contributor to the Reduction in Yields disclosed.


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## Steven Barrett (11 Jan 2018)

Standard Life's KID uses an assumption of 1% ongoing advisor fee, which is the maximum they allow. They also allow 4% set up fee. In reality, no one charges the maximum initial set up fee and maximum ongoing fee (I don't know any advisor in Ireland who charges 1% ongoing). 

The thing is an absolute mess. When it came out I questioned why it didn't apply to pensions as well as investments provided through insurance companies. Now I am thankful as it saves me a ton of time having to explain to people why the actual cost will be lower than the figure shown in a poorly designed document. 


Steven
www.bluewaterfp.ie


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## Dan Murray (11 Jan 2018)

Dan Murray said:


> Arguably, another huge failure of our regulatory system?



Totally agree Steven -

As Dan said - another huge failure of our regulatory system! 

Seriously, is there any limit to the incompetence of the Central Bank of Ireland?


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## KOW (11 Jan 2018)

Stephen long gone with having anything to do with Liberty.
I have contacted New Ireland a number of times and the  staff I have asked to explain  what charges and what structure is in place with the policy simply do not know. Anything from " I dont know" or "its just the way the policy was set up at the time" is all I can get from New Ireland.
Enough is enough.
200k invested for ten years. Now 204k- little more than a 2k gain after over 10yrs. Then inflation.
My own fault. If all costs etc are not 100% transparent only myself to blame.


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## Sarenco (11 Jan 2018)

To be fair, the Central Bank didn't have much of a say in the design of PRIIPs KIDs.

Having said that, we are now in a position where brokers will say that the real cost of an investment product will be lower than indicated in the relevant KID but won't be able to give customers the actual (historic) cost of the product they're selling.

That's hardly a good outcome.


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## Steven Barrett (12 Jan 2018)

Sarenco said:


> To be fair, the Central Bank didn't have much of a say in the design of PRIIPs KIDs.
> 
> Having said that, we are now in a position where brokers will say that the real cost of an investment product will be lower than indicated in the relevant KID but won't be able to give customers the actual (historic) cost of the product they're selling.
> 
> That's hardly a good outcome.



Yes, this is is an EU regulation. Where the Central Bank are found wanting is their refusal to give an guidance on how to apply legislation. Speaking to both insurance companies and MiFID firms, they have told me that the Central Bank will not assist them in interpreting how to apply any of these new rules that are in place. What's the point in that? A firm may interpret something incorrectly and is the Central Bank going to fine them? 

On PRIPPS, the closest way of seeing which fund is the cheapest, is to run specific policy quotes with each provider using the exact same charging structure for each product. As you can imagine, this is a time consuming exercise which will only lead to higher costs to the consumer as more time is spent on their recommendation. There is enough paperwork involved in making a recommendation without having to go through 30 different quotes. 

Or you can just use a fund platform where PRIPPS doesn't apply, you don't have 1% government tax on the way in and all charges are fully transparent and disclosed 

Steven
www.bluewaterfp.ie


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## Dan Murray (12 Jan 2018)

SBarrett said:


> Yes, this is is an EU regulation. Where the Central Bank are found wanting is their refusal to give an guidance on how to apply legislation. Speaking to both insurance companies and MiFID firms, they have told me that the Central Bank will not assist them in interpreting how to apply any of these new rules that are in place. What's the point in that? A firm may interpret something incorrectly and is the Central Bank going to fine them?



To be fair, that's a very key point and a very good post, Steven.

The Regulator is meant to regulate - what we have is a situation where ultimately customers will pay for the production of nonsensical and misleading documents.

A complete farce. Completely unacceptable.


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## Sarenco (12 Jan 2018)

SBarrett said:


> On PRIPPS, the closest way of seeing which fund is the cheapest, is to run specific policy quotes with each provider using the exact same charging structure for each product


Playing devil's advocate for a moment, wouldn't clients expect their brokers to establish the cheapest products?


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## Steven Barrett (12 Jan 2018)

Sarenco said:


> Playing devil's advocate for a moment, wouldn't clients expect their brokers to establish the cheapest products?



In the majority of cases, yes but not all. For example, I have a case at the moment where the client intends to draw down the full value of his ARF over a relatively short period of time. In this case, it is more advantageous for him to take the higher allocation/ higher AMC contract than the lower allocation/ lower AMC contract. It applies in this case because I'm not taking the higher allocation as an advisor fee, I am getting paid the same regardless of the contract type or allocation rate he is getting (the Central Bank are looking at this very closely. Advisors putting clients in high allocation policies but not letting the client see the benefit of the higher allocation). 

In the case of risk products (I know we are talking investments) it certainly does not apply. Some of the cheaper income protection plans are garbage. 


Steven 
www.bluewaterfp.ie


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