Anyone care to comment on this Managed Fund charging structure?

hamster

Hi.

I recently emailed most of the major Irish Finanical institutions on whether they planned to introduce an index-tracker or a low charge managed funds. Needless to say none have uttered their intent to introduce one. However I got a call from Acorn Life. Now I automatically tensed up when I got the call because I'm well aware of what well-informed people here think of them. ie high charges and poor performance etc.

So I gave the caller a chance to make his point. I made clear of my initial impression of Acorn and cut to the chase regarding charges and managed funds on long term performance in comparison to say direct ownership of shares.

He mentioned one of their existing managed funds which I will receive information on in the post in a few days. Basically this what is what I picked up:

Say, if you were investing for the long-term starting by putting away 250 Euro/month.

* The 1st nine months are taken 100% by the company in charges in the form of non-allocation units.
* From then onwards a flat charge of 0.5% per year
* No other charges... no bid/offer spread... no policy fee... no exit charge... that's it!

* Final point, if you ever increase the amount, say to 250 for year 2 then the difference (eg 50 euro) is subjected to the same nine months non-allocation regeime.


Now, what do people think of this? The extremely low annual charge of 0.5% makes this look extremely attractive especially after 7+ years. What I'm saying is that if you plan to invest into a fund for the long term the annual charge beats the pants off Ark Life's 1.5% or Irish Life's 1.65% (both with 5% spreads). A 1.5% charge is a killer on a large fund and having just a 0.5% charge is great long term and more that makes up for the non-allocation charges?

10 year (120 month) Acorn example: (0.5% charge and non-allocation periods)
- ignore grow - just analysing the figures

ie, put 250 away per month. That's 3000 per year. 30000 for ten years. A shocking 2250 goes to Acorn for the first nine months, the rest gets invested with a 0.5% annual charge. That's 825 euro in ten years. 3075 euro in charges on 30000 put in.

Hit: 2250 (non alloc. units) + 825 (annual charges) = 3075

compare it with a typical Ark Life managed fund (1.5% charge and 5% bid/offer spread)

ie, put 250 away per month. That's 3000 per year. 30000 for ten years. With the 5% spread charge you lose 1500 over the 10 years and with the 1.5% annual charge on each additional 3000 per year it really adds up. 45 year 1, 90 year 2, ...., total by year 10 is 2475 ... ouch! Conclusion: Don't grow a large fund here or don't stay too long.

Hit: 1500 (bid spread) + 2475 (annual charges) = 3975

Even with 1% it's still not great but at least Quinn Life's index tracker would perform better over the long run (75% of managers don't beat the average)

.... but with an annual charge of 0.5% for something like Acorn's fund would this not do better longer term? Once the obvious traps are avoided.

Traps:
!! Don't withdraw early - kids, weddings, house.
!! Invest the same amount as long as possible (start with figure that account for 15%-20% accumulated inflation)


Year 5 - looks terrible!
Year 10 - better than Ark Life style charges (1.5% & 5% bid/spread)
Year 15+ - starts to pull away from 1% charge funds such as Quinn Life due to 0.5% charges
* Note the managed fund probably will not match growth compared to an index tracker however...

Is this worth exploring? Would a upfront charge be better than wasting time on these non-allocation (ghastly) periods?


I'll look up Acorn's performance history on moneymate. Now while I know that past performance doesn't predict the future... I should be able to see the effect of charges compared to other managed funds...

After all that I will say direct share ownership avoids all that but you might want a fund like that for extra diversity.