Clarification of Fee Terminology

[& Grace Too]

Hi

I have just returned to Ireland after spending the last 15 years (my entire working career) in Canada and I am trying to get up to speed on Irish retail investment product offerings. I am struggling with the level of disclosure and some of the terminology employed. It's a no brainer that commission / investment allocation equates to the North American concept of "Load". I am uncertain though as to what is the equivalent of the Management Expense Ratio (MER). For example I have just received an information package from Eagle Star that refers to an Annual Management Fee of 1%. Does anyone know if this the equivalent of the MER % or is it some type of "Execution Only" custodial fee and there is an MER% charge incurred as well.

 

[F. Kruger]

Investopedia.com defines ‘Management Expense Ratio’ as

Fund operating expenses vary widely depending on the type of fund. The largest component of operating expense is the fee paid to a fund's investment manager/advisor. Other costs include recordkeeping, custodial services, taxes, legal expenses, and accounting and auditing fees. Some funds have a marketing cost referred to as a 12b-1 fee, which would also be included in operating expenses. Curiously, a fund's trading activity - the buying and selling of portfolio securities - is not included in the calculation of the expense ratio.

Costs associated with mutual funds but not included in operating expense are loads and redemption fees, which, if they apply, are paid directly by fund investors

I believe that the equivalent here would be what is referred to as 'Reduction in Yield' (RIY). The percentage that your return on investment is reduced by allowing for the costs and expenses of managing your money.

If the product allows for investment in external funds, the fees associated with these external fund managers should be reflected in the RIY.

If the product allows for indirect investment in ETFs, it is my understanding that the fees deducted within the ETF are not reflected in the RIY.

Custodial Services would probably add 0.03%ish to your cost as an investor. These probably vary from provider to provider and depend on trades, volume etc.

 

[Labguy]

I myself thought that the Managment expenses were the same as the TER - the Total expenses ratio i.e. the expenses in managing the fund in a no trading scenario. The costs associated with trading are extra.

I must say I have always had great difficulty getting the true story from any of these companies, in spite of endless questioning, so I'm interested to hear other responses

 

[& Grace Too]

Thanks. So until I hear or read something in their literature / prospectus to the contrary I'm inclined to equate the "Annual Management Fee" to the product's MER or RIY. In situations where the product is a fund of funds ( ie a typical consensus fund ) I will assume that it includes the subadvisory fees ( the MERs of the third party funds held by the product).

In the quarterly and annual reports I receive from Canadian active fund managers the MER and brokerage commissions ( the costs associated with buying and selling securities ) are separate line items. in my mind the Total Expense Ratio is the combination of the two. Following this line of thinking the MER would be the cost incurred when there is no portfolio turnover ( ie the fund manager does not trade any of the portfolio's securities. )