The passive investors who frequent Monevator love cheap funds like teenage boys love cheap dates. So it was with a certain frisson that I greeted the news that HSBC have fired their incredible shrinking ray at their index fund Total Expense Ratios (TER).
The TERs or Ongoing Charge Figures (OCF) have shrivelled as follows:
|HSBC C Class Fund||Old TER/OCF||New TER/OCF|
|FTSE 100 Index||0.27%||0.17%|
|FTSE 250 Index||0.29%||0.19%|
|FTSE All Share Index||0.28%||0.18%|
|UK Gilt Index||0.28%||0.18%|
That’s Vanguard beating form.
So if you’ve already got a portfolio full of HSBC index funds (as many Monevator readers do), you’ll be reaping the reward of the lower cost shortly, right guys?
C no evil
Yeah, no. The weeny OCFs only come with a new spin-off version of the fund – the so-called C class.
The C class funds are clones of the familiar retail share class index funds used in the Slow & Steady portfolio.
The holdings are the same and the roles played in a portfolio are the same. The only differences are the 0.1% snipped off the price tag, limited availability and the backflips you need to do to calculate whether these funds are actually a good deal. We’ll come back to that in a minute.
You can spot a C class fund in your broker’s listings by the telltale C it will have in its name. For example:
HSBC FTSE All Share Index C
The ISIN numbers are different from the retail versions of the HSBC index funds so, if you want to convert to C class, you’ll need to order your broker to make the switch.
C no funds
But your broker may not stock the C class funds.
The back story is that these funds are not primarily intended for retail investors. They’re designed for the likes of Independent Financial Advisors (IFAs) who need to be squeaky clean about charges once the RDR regime kicks in on January 1.
Listings by execution-only brokers seem pretty haphazard, so far I’ve found the C Class on:
- Interactive Investor
- Cavendish Online
The common link is Cofunds. Cofunds is a generic fund investment platform that is rebadged by brokers wishing to offer their own service. It’s a bit like discovering that all the cosy country pubs in your area are run by the same mega-brewery.
Not every Cofunds-backed broker is stocking the C class yet and HSBC are supplying other platforms too. My best advice is to call your favourite broker to see what they can do.
Sadly, the choker is that you’re unlikely to get the C class funds without having to pay extra platform charges. And these charges will wipe out the cost advantage for most investors.
C no difference
HSBC slashed the cost of the C Class by stripping out the 0.1% platform fee that is bundled up in the OCF paid for the retail versions.
Vanguard refused to pay this fee from the beginning which is the main reason why their funds weren’t sold on many platforms. It’s also why you’ll always pay a dealing fee or a platform fee (or both) to own Vanguard funds on top of the OCF.
So let’s face it, no platform that wants to stay in business is going to offer us HSBC C class index funds for free.
Platforms are going to levy an additional fee to put the C class on their shelves. The difference is that you’ll know what you’re paying, to whom and why, and that’s the whole point of RDR.
Sadly, the out-of-the-closet platform fees are considerably more painful than the hidden ones of old that nobody talked about.
Returning to our C class listing brokers:
Clubfinance – said the funds were listed by mistake. When they are made available then they will cop the following extra charges:
- £40 annual fee
- 0.29% on the first £100,000
- 0.26% on the next £150,000
- And so on, up the tiers until you’re paying a mere 0.15% after the first million
- This is known as the Cofunds Explicit Charging Structure
- 0.1% Clubfinance platform fee
Interactive Investor – we know all about thanks to their price rise car crash earlier in the year:
- £80 p.a. platform fee
- £10 dealing fee on funds
- Some free trades available and regular purchases are £1.50
Commshare – the staffie I spoke to didn’t know anything about additional charges, but I’ve since found this on their website:
We can arrange investments in No-Trail Funds in return for a fee (typically 0.25% p.a. of the value of your No-Trail funds) charged to your CommShare Cash Account.
Cavendish Online – again, the support staff got a ‘computer said “no”’ on platform charges but the website makes it clear that investors will be hit by Cofund’s explicit charging.
Best case scenario
Most small investors are clearly better off sticking with the regular retail HSBC index funds and a no-fee broker.
The C Class funds only work if you can reduce the explicit platform fees to less than 0.1% of your assets.
So if you’ve got over £90,000 in HSBC index funds and can restrict your trading fees to £10 per year then the C Class will just edge it at Interactive Investor.
Where the C Class index funds butt up against Vanguard there’s now very little difference in OCF. The game essentially comes down to who can offer the cheapest platform fees.
There is another one
HSBC themselves offer the only faint hope of a clear cut winner, if they decide to sell the C class funds directly to investors sans platform fee.
Monevator reader and MSE forum Sensei, Snowman, has been tipped off that this could happen from mid November.
I tried to confirm this with HSBC but was told only that the C Class would be made available through their Global Investment Centre by January 1 and that charges are still being worked out.
So who knows? Not the HSBC frontline staff, anyway.
Take it steady,