With fees, a little understanding goes a long way

What are you paying for your investments? Find out with a guide to your main charges

PUBLISHED : Monday, 29 April, 2013, 12:00am
UPDATED : Monday, 29 April, 2013, 3:59am


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Fees are central to investing, but they are also much misunderstood. They are split into many categories, and disclosure varies from fund to fund.

Managed funds

Managed funds are unlisted unit trusts. They are the standard mutual funds you see in banks.

The first thing you pay is a selling commission, usually a one-off charge of up to 5 per cent. High-value (in other words, rich) clients will often be offered a discount on this fee, down to as little as 2 per cent. Even if you're not loaded, always ask for a discount.

Investors usually focus on the management fee, and rightly so, as it's typically the biggest recurring cost of any managed fund. The annual charge is paid to fund managers to make decisions about which investments should go into the fund. Fund houses will charge up to 2.5 per cent for this service, but more typically it comes in at around 1.5 per cent.

Funds also have other costs. These include charges for accounting, custody, depository services and general administration. Bigger funds can disperse these charges over a wider base and generally the cost is manageable - less than 1 per cent a year. Note that Hong Kong funds vary greatly in their disclosure of this information. Some funds provide it on key fact statements (the main documents investors see), others do not. You might have to dig into a fund's annual report to get the details.

Exchange-traded funds

These are funds that trade on an exchange, just like stocks.

You pay no selling commission, which is the big attraction of ETFs. You just pay a brokerage charge to whoever is offering the instrument, usually 0.25 per cent or lower.

Management fees are also low on ETFs, usually about one-third those of managed funds. This is because ETFs do not usually involve active management, rather passively tracking an index. They are easier and therefore cheaper to manage than active funds.

Investors often buy managed funds rather than ETFs not just because they think an active investment style can bring higher returns, but also because they offer more choice. For instance, only two of the 111 ETFs that trade in Hong Kong are invested in bonds. For various technical reasons, ETFs are ill-suited for bond investing. If you want a debt fund - and many Hongkongers do; they are the most popular fund category - you have vastly more choice among managed funds.

Things get a bit tricky when it comes to ongoing fees. ETFs' administrative costs are usually about equal to those of managed funds. But Hong Kong is home to a broad range of synthetic ETFs that use derivatives, usually to invest in mainland-listed equities.

Synthetic ETFs involve collateral costs that can be as high as 2 per cent a year. These costs are not disclosed in product documents, and they are not part of total expense ratios, which are supposed to reflect a fund's all-in costs. The collateral charges are a mystery expense that is quietly deducted from a fund's net asset value.

Mandatory provident funds

Everyone likes to beat up on Hong Kong's mandatory retirement scheme, but investors should give the MPF its due: the funds tend to have lower fees and expenses than managed funds outside of the programme.

This is partly because MPF funds get a lot of scrutiny. Fund providers were criticised in the past for charging excessive fees. But over the years they have been steadily pushed back on what they can charge. Almost no MPF funds involve a selling commission, for example.

Fund providers also know that once they've lured someone into a plan, they might keep their money there for many years, perhaps for as long as their whole working life. So that long-term proposition gives providers an incentive to pare back on fees.