The F word is the dirtiest word in finance. The F word = fees. Investors want to pay as little as possible and managers are constantly battling to justify them. It’s a delicate subject.
A typical listed investment company (LIC) might charge a management fee of around 1%, while for an exchange traded fund (ETF) the fee might be a fraction of that.
Pretty reasonable isn’t it? The managers are putting their years of experience to work for a measly 1%, while you try forget the market exists. As John Addis explained last week, though, you need to think of the fee as a portion of your return, not of your investment, which bumps it up to more than 20%.
It gets murkier still, though, when you look at the total expenses, including various admin fees and of course brokerage. You can get these figures for ETFs and LICs by digging into their latest annual report. First find the figure for total expenses; then divide it by total assets. This will tell you what you’re paying as a proportion of the fund’s assets.
In Table 1 we’ve shown two ETFs and two LICs. The lowest in fees is the oldest LIC in Australia and the most well known. It is often referred to as an index tracking LIC despite having a management team behind it. When AFI calculates its management expense ratio (MER) it includes all costs including brokerage. You can’t say fairer than that.
|STW||SPDR S&P / ASX 200 ETF||0.27|
|YMAX||Equity Yield Maximiser Fund||0.92|
|AFI||Australian Foundation Investment Company||0.16|
SPRD S&P/ ASX 200 ETF (which tracks the ASX 200 index) and the Equity Yield Maximiser Fund, meanwhile, talk about fees of 0.19% and 0.59%, but this gets bumped up to 0.27% and 0.92% once all recoverable expenses are included, such as listing fees, audit fees and brokerage expenses. That’s still pretty reasonable – although not quite as reasonable as some might expect.
For WAM Capital, we start with a 1% management fee, but that gets bumped up to 2.13% when we include the performance fee, and then up to 2.52% after including other expenses like brokerage.
As a percentage of the 7% average return we might expect for the market, WAM Capital’s expenses rise to over a third. WAM Capital would point out, quite reasonably, that the 2.52% is in respect of returns much greater than 7%. Over the past year it has managed a return of 22%; and of course if it only performed in line with the market, then there would be no performance fee.
The fees charged by WAM, however, are still higher than a cursory perusal might suggest – and they’ll remain relatively high even if performance falls away.
So when you’re putting your cash into any investment vehicle always read the fine print. Find out what you’re paying because these extra expenses will come out of your returns. And returns are every investor’s constant battle.