It’s like the sinister moment in a film, when the lead character is replaced by a dead ringer with a mole in a slightly different place. While we investors carry on with our daily lives, the familiar old Total Expense Ratio (TER) is being quietly removed from the scene, and the Ongoing Charge inserted in its stead.
Both figures do much the same job, by providing a comparable number for the cost of investing that we can use to pit funds against each other.
But the difference between the two doesn’t amount to much more than parting their hair on opposite sides.
It leaves me wondering what on Earth is the point of the change?
You’ve got to be KIIDing
A fund’s Ongoing Charge is found in the Key Investor Information Documents (KIIDS) that accompany common retail funds like ETFs, Unit Trusts, and OEICs1.
The Ongoing Charge is essentially the percentage of your fund holdings that will disappear in costs every year.
For example, if you have £1,000 in the Magical Unidirectional Gain ETF (MUG) and its Ongoing Charge is 0.5%, then you will pay out £5 a year in charges:
£1,000 x 0.005 = £5
This charge is deducted from the return of fund rather than directly from your pocket, but it does not include all the costs of owning a fund (never mind the other costs you pay out to brokers and so on).
The shopping list of expenses that the Ongoing Charge represents appears to be indistinguishable from the TER, barring a few technical differences. And my random sweep of a handful of index funds and ETFs from various providers suggests that Ongoing Charges and TERs are practically the same in most cases.
The major exceptions are the HSBC index funds that feature prominently in Monevator’s Slow and Steady portfolio.
TERs for these funds have all jumped in the transformation to Ongoing Charges. The most extreme case is the Pacific fund, which has an Ongoing Charge of 0.46% in comparison to a TER of 0.37%.
But why the change in the first place? As if to underline the negligible impact it’s made, most product provider’s websites are swapping between the terms TER and Ongoing Charge as freely as Genghis Khan swapped between wives.
The price is not right
Created in a fit of regulatory spring-cleaning, the Ongoing Charge is meant to tidy up the nagging suspicion that the Total Expense Ratio confuses the hell out of investors because:
- It is certainly not a total summation of all the expenses investors pay. Neither is the Ongoing Charge of course, but then it doesn’t sound like it is.
- There was no enforceable requirement for funds to display the TER. Now they must show the Ongoing Charge figure prominently in the KIID.
So what significant fund costs are missing from the Ongoing Charge?
- Performance fees – Though you wouldn’t expect to pay these if you stick to index trackers.
- Entry and exit charges – The extra charges you pay when you buy or sell your holdings. Some of the ETF KIIDs mention a percentage charge in this category, but this doesn’t actually apply to retail investors like you and me. We pay our broker’s dealing costs instead.
- Trading costs – The commissions your fund stumps up to brokers to buy and sell assets. Frequent trading increases costs, but you’ll still have to scour the fund’s annual report to find its Portfolio Turnover Rate (PTR) if you want to get a handle on this.
- Stamp duty – Another trading cost, that’s only paid on UK equities. This one generally shows up in the fund’s tracking error and annual report.
Frankly, the change is a cosmetic one and falls a long way short of providing investors with a simple to understand figure that represents the true cost of investing.
The Ongoing Charge is about as accurate a price tag as the face value of a low-cost airline ticket before they’ve bolted on your baggage fees, credit card fees, and breathing oxygen charges.
In terms of progress, it feels about as significant as the invention of the blue Smartie.
Take it steady,
The Accumulator
1. The Accumulator, thanks, as ever, for this.
2. This fund costs situation is such a mess.
3. I’ve always found it very confusing when the same fund manager uses different terms interchangeably, it seems, for its fees. For example, the UK website for db x-trackers ETFs quotes TER for each fund. Fine. But the fund factsheets [PDFs] there quote the same values – but as ‘All-in fee’, instead. Similarly, Amundi ETF (UK) use TER and ‘annual management fees (all taxes incl.)’ interchangeably. I had a correspondence about this with Amundi ETF (UK) last year: I told them how confusing it was. Their UK press releases refer to fund TERs, while the same values are described as ‘annual management fees (all taxes incl.)’ on their website.
Designed to keep customers confused and less able to usefully compare one product with another? Or just change for its own sake? Global warming? Global Cooling? Climate Change? This is the first I’ve heard of OG, thanks Accumulator, will keep a look out for it from now on.
I really do not think it’s to keep investors ‘confused’. The trouble is the industry has become so heavily regulated, marketing is like walking a tight rope. Bureaucracy on steroids is the issue.
Does this mean the TER for the HSBC index funds have gone up? I was just about to transfer my ISA into a portfolio similar to the Slow and Steady Passive portfolio. Is it just better to stick to Vanguard LifeStrategy and pay the platform fees in that case?
@ Jessica – The charge for some HSBC index funds has gone up, yes. I haven’t done a meticulous calculation but I would say the Slow & Steady portfolio is still cheaper. It’s only really the Pacific and Japanese funds that have jumped significantly.
@ Alex, Drew, MCF – Yep, it’s messy. I almost didn’t write this post because the change is so superficial, there is very little to say. But then I thought about how the lack of clarity in the investing world absolutely drove me mad as a novice investor, so it seemed worthwhile to try and shine a light on what’s happening. I do think Total Expense Ratio was a misleading term but it’s a real shame that we still have to go deep diving in to the annual accounts to find turnover rates and the like.
One significant difference between TERs and OCFs is that custodian charges are included in the new criteria – so costs of holding overseas stock that used to be charged to performance is now explicitly stated in the additional charges – which is why your HSBC examples have such a leap from TER to OCF – a cursory glance at most providers international trackers confirms this
Whether it is the TER or the OCF or simply adding up everything in the latest long form set of report and accounts, it’s only ever an out of date indicative percentage by the time it gets published.
Fund mangers have up to four months from the annual accounting date to prepare the accounts and gain audit approval before making the report public. The data covers the full year leading up to that accounting date so it always looks back and does not give investors any certainty about the future expenses of the fund but then nothing ever can.
The overall difference between a fund AMC and it’s true total operating expenses should be negligible and easily recovered by the performance of a good investment manager. If a client is put off by the thought of paying a handful of bps more that is described in the literature then they’re not buying the fund for what it can achieve for them.
If it’s clarity we’re after then the numbers are in the annual report for everyone to see. I just feel there’s so much focus on driving costs into the floor rather than looking at the factor which gives the most impact…investment management – which is what the investor is really looking for.
Looks like those of us with passive fund holdings are going to get a bit stiffed. In the HL FAQ, they say:
“To help offset this, or save clients with smaller passive holdings even more money, we are introducing new ranges of super-low cost index tracking funds from Legal & General and BlackRock, with annual management charges starting at just 0.06%.”
Anyone got the gen on what these funds will be?
S
@ Soup – Here you go: http://monevator.com/online-broker-price-scramble/comment-page-2/#comment-618132
What’s your advice on funds that change their OCF? I invested in an L&G fund a few years ago at an OCF of 0.33%. I came across by chance and realised the OCF is now 0.63%. Would you recommend pulling my funds and invest in a similar index? (I won’t be losing money)
Hi Tandy,
That’s a surprising cost increase and I’d be inclined to move. Just so you’ve got a more rounded picture, here’s a few pieces to help you think it over:
How much difference does it make?
https://monevator.com/switch-to-cheaper-index-funds/
Risks
https://monevator.com/what-are-the-risks-of-being-out-of-the-market/
Alternative funds
https://monevator.com/low-cost-index-trackers/
Hassle factor
https://monevator.com/how-to-transfer-a-stocks-and-shares-isa/
Thanks for the links! The first article makes clear the kind of amounts at stake. In my situation, I realised I have one type of share of the fund while I was reading the KIID of another type of share in the same fund! D’oh indeed.
That would explain it. Tracker OCFs often calcify but they rarely shoot up like Renton after a night out.
Can the OCF for a given fund vary between platforms? I’m talking about the same ISIN. I have an example at the moment where the fund OCF (on the fund provider site and everywhere I can find but my platform) is 0.29%. My platform says it’s 0.31%.
When questioned they say that “You may see a difference in price on other sites as our custodian will have a different agreement to another company. Hence the difference in percentage.”
I’m less worried about the actual small difference here than the fact that if true, it means I don’t understand how all this works – and I thought I had a reasonable grasp.
I thought that sort of thing ended with the RDR and that I should be able to assess fund holding costs, transaction costs and platform fees separately. i.e. once I’ve decided to move to a platform after assessing fees, platform features and service etc I can assume that any fund which they offer (availability is another can of worms I find in practice) will cost the same as anywhere else.
Am I wrong?
Thanks
Stuart
Answering my own question in comment above…
TL:DR – Vanguard OCF was out of date. The Investor’s conclusions in the final two paras. above are correct 🙂
——
I think the response from my platform provider was nonsense (and I’ve seen others having similar issues with another platform), but Vanguard have now said (on the third attempt) that the rate on their main funds list was out of date and they were “in the process of updating”. I had two responses from Vanguard before this from someone who just tried to tell me what an OCF was rather than answering the question about the discrepancy.
To add to the confusion, some sources of funds data were already listing the fund as AMC 0.29% and OCF 0.31%. Somehow they were more up to date than Vanguard.
My conclusion was that my basic understanding was sound, but in trying to get to the bottom of this, I learned that I did not appreciate some of the nuances given that the OCF can/will change every year due to variable costs and is quoted based on an earlier year (e.g. this fund was based on year ending December 2019).
So after we’ve had AMCs, TERs and now OCFs, we’re still only in the land of time and materials with an estimate up front basically. Not sure why the industry and regulators have found this one so difficult to crack (cynics insert your favourite theory here [……]). The quoted price should, to me, include all the costs under the provider’s control on a fixed basis (e.g. if audit costs are higher they need to swallow them (or agree fixed proces with their auditors!)). Other costs (notably trading expenses which they can of course not predict) would reasonably remain variable (and are buried in fund performance at the moment anyway).