The International Investor

RDR update: Alliance Trust Savings and ICICI Bank UK

News

Jan 102013

The temporary but large reduction in funds available for investment on the Alliance Trust Savings platform – give quite high profile coverage in the Daily Telegraph – is another example of why picking a new fund supermarket requires caution while the effects of the Retail Distribution Review are still working their way through.

I am not inclined to castigate ATS too much over this – it is reacting to RDR and the platform review far more pre-emptively than most of its peers and it’s to be commended for moving to clean pricing as quickly as possible. Perhaps the change could have been better communicated, but ATS seems to have a fairly comprehensive RDR changes page to update users on progress.

The new terms on fund charges [PDF] generally look significantly better. Obviously, you need to allow for ATS’s charges on top of the clean fees, but seeing some firms already bringing their fees down on a transparent basis should hopefully drive competition across all platforms. Continue reading »

Unbundled pricing for UK fund supermarkets

News

Nov 132012

The FSA’s Retail Distribution Review (RDR) is set to shake up investment costs in the UK enormously over the next year or so. With effect from January 2013, financial advisers will no longer be able to receive trail commission – ongoing payments from fund groups – on new investments.

More importantly for DIY investors, the FSA is then likely to ban fund platforms for receiving trail commission with effect from January 2014. This means that the fees currently charged by many execution-only firms will have to change drastically.

Once that happens, many of the details in this site’s UK fund supermarket comparison table will change significantly. Unfortunately, exactly what fund supermarket pricing will look like once RDR is complete isn’t clear, making it hard to choose a new provider at the moment.

However, many of the major fund platforms have now announced their “unbundled” charging schemes – unbundled meaning that they must transparently and explicitly charge the investor for their services, rather than getting paid a platform fee in the background out of trail commission. And this is beginning to give us some idea of what fees may look like in a year or so. Continue reading »

Barclays and the spirit of RDR

News

Oct 212012

Citywire is reporting proposals by Barclays to counteract the FSA’s forthcoming Retail Distribution Review ban on funds paying trail commission to intermediaries, by trying to charge the fund providers “administration fees” for having their products on its platform.

Whether the FSA will permit this isn’t clear, but the idea seems to go against the initial spirit of RDR. The FSA’s professed goal is for all the costs to be transparent to the client – they should be paying explicit charges for using the platform, as a flat fee or percentage of their holdings. Not imposing these and instead charging opaque admin fees to providers is not significantly different to the current system of trail commission.

It’s hard to argue that this comes out of the provider’s own margins – that simply means that rather than management fees falling to (say) 0.75% to reflect what the fund firm currently gets, they will just fall to (say) 1% to cover the extra payment that the firm must make to the platform. It will be an implicit share of the fees rather than an explicit one, but the same outcome. Continue reading »

Best Asian income investment trusts and ETFs

Investment

Oct 282011

This is the second part of a review of Asian income funds and emerging market income funds for UK investors, focusing on investment trusts. Click here for Asian income funds – unit trust and oeics.

Asian income funds – investment trusts

There are three Asian income investment trusts in the UK market. And it shows how keen investors now are on the income theme that none trade at a significant discount to net asset value (NAV) – for most ITs, a small discount to NAV is normal.

The Aberdeen Asian Income Fund (LN:AAIF) has a rather different geographic focus to the funds we’ve already looked at in part one – it’s much more geared to Southeast Asia. Singapore is the single biggest holding at 20%, followed by Australia and then Malaysia and Thailand. It doesn’t include a sector breakdown in its factsheet, but I estimate that the biggest holdings are the familiar duo of financials and telecoms at 25% and 20% respectively

Best Asian income funds and emerging market income funds

Investment

Oct 282011

Asian income funds and emerging market income funds may sound like a contradiction. After all, Asia and emerging markets are supposed to be growth investments. So why turn to a growth market for income?

In fact, Asian income and emerging market income are themes that make a lot of sense when choosing funds, for several reasons.

First, emerging market dividends are no myth. Many emerging markets stocks now have a culture of paying high dividends, so they make up a major part of investment returns in several countries. Dividends accounted for 30% of Asia ex Japan returns over the past decade – about the same as in developed markets.

Holding foreign funds and ETFs in an ISA

FAQs

UK investors are often unsure about the rules for holding foreign funds and exchange traded funds (ETFs) in an Individual Savings Account (ISA).

The regulations on foreign shares are clear. These are eligible for an ISA if they trade on a recognised stock exchange. But funds – especially ETFs – never seem so simple. Even the ISA providers sometimes disagree on what’s eligible.

HMRC has a short list of ISA eligible investments online, but it still leaves some points unclear. So I asked HMRC’s ISA specialists to confirm some of the less straightforward situations.

In general, their answers mean that most foreign funds and ETFs will not be eligible, although there are a couple of exceptions. For the details, read on.

Avoid the tax trap on foreign funds

FAQs

The UK and the US have very harsh rules on taxing profits from foreign funds. Both will tax any capital gains you make from most foreign funds at income tax rates rather than capital gains tax rates.

These rules were originally brought in to stop investors reducing their income tax by rolling the income up in an offshore fund and taking it as a capital gain. Since capital gains tax rates are usually lower than income tax rates, doing this could save a lot of tax.

So the authorities cracked down. Unfortunately the rules are very broad and catch many investors who simply want to invest in a fund abroad because an equivalent fund isn’t available at home.

The result is that foreign funds are usually very unattractive for US investors, because the tax penalties can wipe out any gain. For UK investors, the situation isn’t quite so bad – but they should stick to foreign funds with a special tax status where possible. Let’s look at the details for both.

The best offshore fund supermarkets

FAQs

Update: The site now has a comparison table of offshore fund supermarkets. Read that to compare what’s available, read this article to understand why the choice is so limited.

If you prefer to search out the best funds on offer rather than just buy what’s being advertised heavily, you may be very frustrated by the limits your fund supermarket imposes on you.

Perhaps you want to invest in funds that aren’t distributed in your home country. Or you may be an expat, looking to invest in the same funds you used before, but can’t get an account at home because you’re no longer resident.

Given how easy it is to open an account with a foreign stock broker that trades multiple international markets, you may be wondering if it’s possible to do the same with funds. Are there any offshore fund supermarkets that let you buy funds from around the world?

Frankly, choices for retail investors in this area are slim. International fund supermarkets are an underdeveloped niche, probably because the number of people who have this need is relatively small, while regulation can make the idea awkward. But let’s take a look at what’s available.

How fees affect investment fund returns

Investment

Aug 192011

Most investors understand that the fees they pay to fund managers have an impact on their investment returns. But it’s easy to overlook quite how large that impact can be. It’s also easy to focus on the wrong fees – putting a lot of effort into reducing one, when it’s the other that matters more.

So exactly how much do fees matter and what should you do to cut costs? Let’s take a look at a real example.

Before we begin, let’s recap what fees we’re looking at. There are two different sets of fees that fund management firms normally charge. One is the entry fee or initial charge, a one-off fee levied when your investment goes into the fund. The other is the annual management charge, which is levied on a recurring basis.

There are some other possible fees to keep in mind. For example, an exit fee might be charged when you withdraw your money or a performance fee levied when returns pass a certain hurdle. But these are less common and so we’ll leave them out for simplicity.

How to choose the best fund manager

FAQs

Choosing a managed fund involves plenty of contradictions. On one hand, each fund boasts how well it’s done in the last year … or three years … or five years. But underneath the glossy advert the regulator has forced it to write: “past returns are not a predictor of future performance”. Which should you believe?

Ask for advice and you’ll regularly be told that managed funds are for idiots anyway. Overall, the average fund underperforms the market once fees and expenses are taken into account. For this reason, supporters of passive investing insist you should forget the whole idea of managed funds and just buy the cheapest tracker fund you can. No manager is a better choice than any manager, they say.

So it’s understandable that a lot of baffled investors make one of two simple decisions. Either they take the advice of just buying trackers, because the tracker argument makes sense. Or they plump for a managed fund from a big, well-known fund manager, because it should be reliable.

Understandable – but wrong. You can do better than either of these options. But successful investing requires work and the same applies to picking funds.

You need to get to grips with how the fund management business works, understand why the vast majority of funds are a bad investment and then put in a bit of time to pick a few that aren’t. This article will explain how to do that.

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