1% mgmt fee uneconomic UK fund mgrs tell UK Govt

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peteyperson
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1% mgmt fee uneconomic UK fund mgrs tell UK Govt

Post by peteyperson »

A 2% world rather than a 1% world?

Pete's note: Fund managers are in consultation with the government over the structure of a proposed savings plan. A little like the ROTH IRA.

Article:

The B&W Deloitte investigation into the proposed simple structure savings and investment products recommended by Ron Sandler is being tipped to recommend to the UK Treasury that the charge cap be set at 2% rather than 1%. The firm was commissioned by the Treasury in April to conduct an independent review of what level the price cap should be set at for the Sandler suite of products.

The firm was given 10 weeks to study how different price cap models would operate and what difference to target market penetration each price cap would make. The financial services industry has been deeply sceptical about the prospect of a 1% price cap, arguing that it would make products uneconomic.

B&W Deloitte's work is now said to be complete and will be published by the Treasury once the Financial Services Authority has released the results of its market research into the sales process of Sandler products.
<snip>

This is the kind of psychology we're dealing with here in the UK from fund management. How can US firms deliver profitable results at 0.20% a year with no sales load and firms here say a 5% sales load and 1% in uneconomic? True, trading costs are higher here but not prohibitively so to justify such a claim. If the British decided on the Nobel Prize for Economics, I think whomever invented ETFs & Index funds should jointly win! :lol:

Petey
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Post by WiseNLucky »

This is the kind of psychology we're dealing with here in the UK from fund management. How can US firms deliver profitable results at 0.20% a year with no sales load and firms here say a 5% sales load and 1% in uneconomic?


Vanguard's unique structure makes this possible. Since the funds are owned by the fund investors (instead of some corporate entity that is trying to make a profit) any cost savings accrue to the fund holders. There are no "profitable results" necessary. Also, indexing takes the management side of the equation away so you don't have to try to hire superstar managers to "crush the market." Finally, Vanguard sells shares in the funds itself, bypassing the very expensive commission market set up to line stock brokers' or financial advisors' pockets.

All of this was set up by Bogle to help the small investor, and Brennan will have a hard time taking it all back. That's why so many refer to Bogle as "St. Jack."

Thank you Jack :D
WiseNLucky

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Post by peteyperson »

Yes, all true. Brennan sure is trying to undo it though or change Vanguard for the worse.

Our lowest UK large-cap index fund (no small-cap index fund available) is 0.35% by a fund company I had not heard of. The lowest mainstream one from a big company is 0.50 - 0.53%. Clearly it is possible to do it for 0.35% here but they choose not to. Oddly, Virgin and Richard Branson who has his brand n fingers in many many pies has a Virgin branded financial product indexing the UK market which costs 1%, top end of the range and has almost as much funds invested as the largest provider, well marketed, at 0.5%. His fund has also only been running since 1999 and the other 12 years. Just shows the power of branding over common sense. People clearly got the message about index funds but not the whole message!

The costs here are pretty standard on active management. 5-5.25% plus another 3% financial advisor fee & 0.50% a year to him/her after that if chosen, 1.76% inc all charges but officially 1.5%. That is still considerably higher than the US. Partly because the index funds are 0.4% more costly, active management is proportionally more expensive, still I think the margins from index to active in the UK is wider than the equivalent margin in the US. We have ISAs here, $10,500 a year, net salary investment, mutual fund investment, no capital gains but tax on dividends. Push for 1% or less to get a govt CAT standard meaning low cost. Industry whined about that, it is going to be abolished as it was aimed at low income earners and mostly high income earners have used it to avoid upper band 41% capital gains tax. The fund companies are now in consultation over an alternative on this and pension plans where again the 1% and less products for low income earners did not sell well. They are using it as an excuse to say 1% is not a good product, we need to charge more so we can get the message out blah blah. Reality is, the low income earners just don't have enough income to save. Generally, they could save a few quid (slang for pounds), but not much.

This is why ETFs are a saviour. S&P 500 index mutual fund, 0.83% lowest cost. UK ETF S&P 500, 0.40%. US sourced, 0.09% plus offshore broker high commissions per trade, buy in bulk every six months.. Even not buying American versions, ETFs still halve the cost or drop it significantly in quite a few cases. Hoping a Asia Pacific one comes out as that is 0.97% index here. The first couple of 0.20% fixed income ETFs have come out in Euros available right across Europe, traded on multiple exchanges. Just shows the power of the Euro kickin in bigtime, E1.8bn in under 2 years. For a Brit, 0.20% anything takes your (financial) breathe away. More products are coming. They're even talking of actively managed funds via ETF which would be interesting to see.

Petey
WiseNLucky wrote:
This is the kind of psychology we're dealing with here in the UK from fund management. How can US firms deliver profitable results at 0.20% a year with no sales load and firms here say a 5% sales load and 1% in uneconomic?


Vanguard's unique structure makes this possible. Since the funds are owned by the fund investors (instead of some corporate entity that is trying to make a profit) any cost savings accrue to the fund holders. There are no "profitable results" necessary. Also, indexing takes the management side of the equation away so you don't have to try to hire superstar managers to "crush the market." Finally, Vanguard sells shares in the funds itself, bypassing the very expensive commission market set up to line stock brokers' or financial advisors' pockets.

All of this was set up by Bogle to help the small investor, and Brennan will have a hard time taking it all back. That's why so many refer to Bogle as "St. Jack."

Thank you Jack :D
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Post by BenSolar »

WiseNLucky wrote: Vanguard's unique structure makes this possible.

Vanguard is the leader and low cost provider due to the items you mention, but it's true there are other, for profit companies, with creditable and cheap index funds. Fidelity being the most obvious. Their Spartan S&P 500 index has an ER of .19%, their International Index .39, and their Total Stock market .25.
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
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Post by bpp »

Hi Petey,
This is why ETFs are a saviour.


A similar revolution is happening here in Japan. Standard fees for active domestic funds are 3% load, 1.5% ER. Foreign funds have an ER of 1.8%. Domestic index funds are typically 1-2% load, 0.5-0.63% ER. The cheaper index funds track the Nikkei 225 index, the more expensive ones track the TOPIX index.

Lately ETFs have been coming out, the cheapest one being a TOPIX tracker with an expense ratio of only 0.11% -- a full 0.52% cheaper than the equivalent mutual fund. It turns out to be worth opening a stock trading account just to load up on this critter, even after commissions and account-maintenance fees.

**Incidentally, though the Nikkei is more well-known outside of Japan, the TOPIX is a better index for tracking the broad market. It is cap-weighted, as opposed to the price-weighted Nikkei, and covers about 90% of the Japanese market by capitalization. And it is completely mechanical -- no committee deciding what goes into it. (I know you had a similar observation about UK indices, Petey.)

Cheers,
Bpp
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Post by peteyperson »

Hey bpp,

Lovely to hear from you. I always enjoy your Japanese market perspective.

Very similar to here on fees for mutual fund indexes minus the sales load. Currently ETFs here, UK 0.35%, USA 0.40%, EUR 0.35%. Although the companies issuing UK ETFs have stalled somewhat waiting a couple of years to see how things go I think. They all have the same range of funds across Europe on multiple exchanges and aren't bringing out many new products. Far more providers across European exchanges but almost all same products for all which is different than the States where it is few providers, lots of product.

Tell me, do you plan to buying international sourced ETFs like has been suggested to me? Any catch you eye? Your ETF fees are significantly cheaper than ours but that may change if we get more competition. At the moment Barclays investment arm dominates in the UK.

The other day I had wondered about the difference between the Nikkei and TOPIX. Sorry for my lack of knowledge here but are they two different stock markets? How can TOPIX cover most of the market?

What are your thoughts on the Japanese market? I have been coming around to investing a small percentage in it. Where do you see banking reform, non-written off unpaid debt etc, it seems the Japanese govt are taking the long road to fixing the problem.






bpp wrote: Hi Petey,
This is why ETFs are a saviour.


A similar revolution is happening here in Japan. Standard fees for active domestic funds are 3% load, 1.5% ER. Foreign funds have an ER of 1.8%. Domestic index funds are typically 1-2% load, 0.5-0.63% ER. The cheaper index funds track the Nikkei 225 index, the more expensive ones track the TOPIX index.

Lately ETFs have been coming out, the cheapest one being a TOPIX tracker with an expense ratio of only 0.11% -- a full 0.52% cheaper than the equivalent mutual fund. It turns out to be worth opening a stock trading account just to load up on this critter, even after commissions and account-maintenance fees.

**Incidentally, though the Nikkei is more well-known outside of Japan, the TOPIX is a better index for tracking the broad market. It is cap-weighted, as opposed to the price-weighted Nikkei, and covers about 90% of the Japanese market by capitalization. And it is completely mechanical -- no committee deciding what goes into it. (I know you had a similar observation about UK indices, Petey.)

Cheers,
Bpp
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Post by bpp »

Hi Petey,

Gotta run right now, so I will get back to you later, but in the meantime leave you with these links to the Nikkei and TOPIX originators:

Nihon Keizai Shimbun's Nikkei225 FAQ:
http://www.nni.nikkei.co.jp/FR/SERV/nik ... aq225.html

Tokyo Stock Exchange's TOPIX:
http://www.tse.or.jp/english/option/topixf/index.html

In summary, TOPIX is a cap-weighted average of all stocks listed on the first section of the Tokyo exchange. Basically the top 1500 stocks by capitalization.

The Nikkei 255 is a subset of the TOPIX stocks, but is price-weighted (like the Dow) instead of cap-weighted. It is put together by committee, kind of like the S&P500.

There are other exchanges and other sections of the Tokyo exchange, but these are the biggies.

More later.

Cheers,
Bpp
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Post by WiseNLucky »

Vanguard is the leader and low cost provider due to the items you mention, but it's true there are other, for profit companies, with creditable and cheap index funds. Fidelity being the most obvious. Their Spartan S&P 500 index has an ER of .19%, their International Index .39, and their Total Stock market .25.


Ben,

None of these would exist without Vanguard and its success. They were put in to stop the bleeding. Since these rates equal zero profit at Vanguard, they almost certainly equal zero profit at Fidelity (or, more likely, are loss leaders with the hope that participants will also put a few bucks in managed funds). If all their funds were to generate zero profit, Fidelity would cease to exist.

Viva la competition!
WiseNLucky

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Post by WiseNLucky »

This is why ETFs are a saviour.


I agree entirely. If Vanguard did not already exist, it would not come into being today. One need only look at Bogle's estimated $20 to 30 million net worth compared to the Johnsons' to tell people that you don't create a Vanguard as a road to riches.

But ETFs are a viable option. My only problem with them is that they are expensive for the small investor who has a small amount of money now, a little more next week, and so on. The only option then is to remain uninvested until savings are sufficient to lower the cost of entry into the market. With discout brokers in the US, this amount is much smaller than it was even a decade ago. I'm sure competition in non US markets will bring brokerage fees down as well.

I truly am grateful for what I have in Vanguard. I wish it were available to everyone.
WiseNLucky

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Post by BenSolar »

WiseNLucky wrote: None of these would exist without Vanguard and its success. They were put in to stop the bleeding. Since these rates equal zero profit at Vanguard, they almost certainly equal zero profit at Fidelity (or, more likely, are loss leaders with the hope that participants will also put a few bucks in managed funds). If all their funds were to generate zero profit, Fidelity would cease to exist.

Viva la competition!

Very true. Good points.
I agree entirely. If Vanguard did not already exist, it would not come into being today. One need only look at Bogle's estimated $20 to 30 million net worth compared to the Johnsons' to tell people that you don't create a Vanguard as a road to riches.

While the comparitive level is low, still $20-30 million is rich beyond most peoples dreams. Maybe someone with a bit of an altruistic bent, along with the desire for money will start a Vanguard-like competitor. I could see a place for an outfit that specialized only in index funds, and which sought to offer every slice and dice option you could dream of. Like a Vanguard version of that bunch (DMA, DCA, DFA?) that requires an advisor for access.

If you could grow a sizeable company with such a concept you would be well rewarded, despite the structure. If you aspire to be on the Forbes 500 list, then that route would not be an option.

I bet Brennan is making a fortune heading up Vanguard at this time, with all the 'performance bonuses' we hear about ...
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
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Post by WiseNLucky »

I bet Brennan is making a fortune heading up Vanguard at this time, with all the 'performance bonuses' we hear about ...


I agree. He will retire a much wealthier man than Bogle. He had the advantage of inheriting the behemoth after Bogle nursed it throught the tough first few decades. Kind of like the cat who found a bird's nest on the ground. :?

That is why I am grateful to Bogle. :D
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Post by peteyperson »

Very useful links, thanks.

The index funds in the UK focus on the FTSE World Japan index but their site offers scant information on its makeup. I think the US ETFs will be more likely to focus on other benchmarks like MSCI Japan perhaps. Have to see what that covers of the market.

I look forward to hearing more from you when you have more time.

Regards,
Petey
bpp wrote: Hi Petey,

Gotta run right now, so I will get back to you later, but in the meantime leave you with these links to the Nikkei and TOPIX originators:

Nihon Keizai Shimbun's Nikkei225 FAQ:
http://www.nni.nikkei.co.jp/FR/SERV/nik ... aq225.html

Tokyo Stock Exchange's TOPIX:
http://www.tse.or.jp/english/option/topixf/index.html

In summary, TOPIX is a cap-weighted average of all stocks listed on the first section of the Tokyo exchange. Basically the top 1500 stocks by capitalization.

The Nikkei 255 is a subset of the TOPIX stocks, but is price-weighted (like the Dow) instead of cap-weighted. It is put together by committee, kind of like the S&P500.

There are other exchanges and other sections of the Tokyo exchange, but these are the biggies.

More later.

Cheers,
Bpp
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Post by peteyperson »

Some very salient points, Wise.

I too am concerned about the brokerage fees and the playoff between investing frequently at higher cost or lost of cumalitve return as I save up money in six month chunks. Not sure which is worse as yet.

The only international fund I'm sure delivers what I need in the US is in the hundreds of dollars for sizeable trades and $30 for the smallest. Ameritrade may be a bit cheaper, however they don't let non-customers sufficiently into their site to confirm first-hand what they offer. At the moment I just have to take Ben's word for it. Competition will be different in so much as offshore online brokers aren't yet too competitive. Most people don't invest offshore, in the UK it is usually the preserve of the wealthy.

P.S. While I certainly take your point about the Fidelity riches, $20-30m ain't too bad. Even people who saved and invested all their lives would be lucky to have 1/10th as much.

Petey
WiseNLucky wrote:
This is why ETFs are a saviour.


I agree entirely. If Vanguard did not already exist, it would not come into being today. One need only look at Bogle's estimated $20 to 30 million net worth compared to the Johnsons' to tell people that you don't create a Vanguard as a road to riches.

But ETFs are a viable option. My only problem with them is that they are expensive for the small investor who has a small amount of money now, a little more next week, and so on. The only option then is to remain uninvested until savings are sufficient to lower the cost of entry into the market. With discout brokers in the US, this amount is much smaller than it was even a decade ago. I'm sure competition in non US markets will bring brokerage fees down as well.

I truly am grateful for what I have in Vanguard. I wish it were available to everyone.
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Post by WiseNLucky »

P.S. While I certainly take your point about the Fidelity riches, $20-30m ain't too bad.


I agree with Ben and your thoughts. But realize, his success was on the level of the Johnsons (Fidelity), Waltons (Wal-Mart) and Bill Gates (Microsoft) and all of them are multi billionaires. Few people would take on the risk and put in the effort to grow a company to the size of a Vanguard with that small of a potential lifetime return. We're talking less than 25% of Grasso's former annual compensation. In perspective, it's not much money.
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Post by bpp »

Hi Petey,
Tell me, do you plan to buying international sourced ETFs like has been suggested to me? Any catch you eye? Your ETF fees are significantly cheaper than ours but that may change if we get more competition. At the moment Barclays investment arm dominates in the UK.


I'm certainly thinking about some international-sourced ETFs, if the transaction costs can be kept down to a reasonable level. I suspect things will improve over the next few years, if the exchanges link up with each other as they periodically talk about. For example, there is supposed to be some agreement between the Tokyo Stock Exchange and American Stock Exchange to eventually cross-list ETFs with each other. Don't know when or if this will really happen. Meantime, I would have to pay fairly hefty fees to get a Japanese or US broker to buy foreign-listed shares. Or, I could try to open accounts in several other countries, though on further reflection that seems like a potential tax-accounting nightmare. (Or a good way to invite tax audits. :shock:) And it might not even be much cheaper.

The ones that have caught my eye so far are the Canadian REIT ETF from Barclays (XRE) that I mentioned on the Index Funds board, and the Euro corp. bond and Australian property ETFs that you have mentioned. What I'd really like are some good global real-estate, bond, etc. ETFs, for one-stop shopping without having to cobble together little bits from here and there. Perhaps those will be along eventually.
What are your thoughts on the Japanese market? I have been coming around to investing a small percentage in it. Where do you see banking reform, non-written off unpaid debt etc, it seems the Japanese govt are taking the long road to fixing the problem.


Well, I'm certainly no expert, but I do get the impression that progress is being made. Slowly, but things are moving in the right direction. One good sign is that PM Koizumi came out of the recent party election stronger than he went in, so the reform factions that he leads are getting stronger and stronger. It looked fairly dicey early on in his tenure, but I think it will be hard to turn back the tide at this point. However, the hole was dug so big and so deep that it will take a long time to climb out. So I'm optimistic over the long term. Short-to-medium term, well, I have to suspect there are likely to be a few more big "buying opportunities" along the way. :wink:

Cheers,
Bpp
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Post by bpp »

Hi WiseNLucky,
But ETFs are a viable option. My only problem with them is that they are expensive for the small investor who has a small amount of money now, a little more next week, and so on. The only option then is to remain uninvested until savings are sufficient to lower the cost of entry into the market.


That is a problem. One possible solution is brokerages that offer pseudo-DRIP programs for partial share purchase, like Sharebuilder. Though they look a bit expensive, I admit.

Cheers,
Bpp
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Post by peteyperson »

Hi bpp,

I have posted in a new thread some links with info on various international ETFs inc the Australian one. Extensive articles on a range of foreign ETFs, credit ratings on US Bond ETF etc.

Petey
bpp wrote: The ones that have caught my eye so far are the Canadian REIT ETF from Barclays (XRE) that I mentioned on the Index Funds board, and the Euro corp. bond and Australian property ETFs that you have mentioned. What I'd really like are some good global real-estate, bond, etc. ETFs, for one-stop shopping without having to cobble together little bits from here and there. Perhaps those will be along eventually.
Cheers,
Bpp
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Post by bpp »

Hi Petey,
I have posted in a new thread some links with info on various international ETFs inc the Australian one. Extensive articles on a range of foreign ETFs, credit ratings on US Bond ETF etc.


That's a good comprehensive list you've posted there. Maybe it would be worth adding to the NFB links page?

Cheers,
Bpp
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Post by ataloss »

Few people would take on the risk and put in the effort to grow a company to the size of a Vanguard with that small of a potential lifetime return.


otoh, Bogle was sort of forced out of Wellington and backed into founding Vanguard. The bear market of 73-4 and his misfortune caused his interests to align with those of the shareholders
Have fun.

Ataloss
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Post by peteyperson »

Perhaps, but that would be rather self-serving. I cannot see him carrying that off over such a long career. I cannot also see him continuing to work at Vanguard continuing the indexing crusade when he could easily be "sitting on a beach earning 20%" - Die Hard :lol:

I think for someone who has done so much for the individual investor as opposed to the fund companies who take so much away, I think he deserves the benefit of the doubt!

Petey
ataloss wrote: otoh, Bogle was sort of forced out of Wellington and backed into founding Vanguard. The bear market of 73-4 and his misfortune caused his interests to align with those of the shareholders
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