A key question when researching where to invest is, how do fees affect the value of different investments over the time? Gains can be substantially eroded over time by the fees associated to an investment; the key is not to flock to the lowest-charging option, however, but to seek value for money.
There are two fee types that one must consider to effectively understand what the cost of ownership actually is; these are the costs of administering the investment, and the cost of managing the investment.
Administration costs can vary by investment, for example not all investments will be available on the investor’s chosen investment platform and may have to be administered separately. Costs may be incurred at all stages of the investment lifecycle – for example adding a new investment, on-going fees to cover custody and issuing client valuations and then again at the end in respect of distributing the proceeds.
One criticism of retail based structured products is that they can sometimes be complicated and costly in their fee frameworks, often combining administrative and managerial costs associated with the investment into one amount, thus leading to the claim that they can be difficult to understand when providers disclose their fee. The combined cost is sometimes as much as 4% of the investment amount, and this cost is incurred within the packaging of the investment, before the terms are offered to the investor. Therefore, no explicit charge is deducted from the investors’ capital in this respect.
However, acquiring a structured product almost always involves an intermediary which means fees are payable for advice and or execution. Such fees are likely to reoccur when maturity proceeds are reinvested when, additionally investors are likely to incur a period of being out of the market, which itself could prove costly depending on market movements. Finally, whilst it ideally should not be a factor, in the event that the investor wishes to withdraw from a retail structured product, prior to a defined maturity, early surrender penalties often apply.
So how does a comparable investment in the Lowes UK Defined Strategy Fund (the “Fund”), which on the surface looks very much like a portfolio of the above said structured product, look for an investor?
Firstly, Lowes Investment Management Ltd (“the Investment Manager”) will face the financial institutions directly on behalf of the Fund, which has the effect of wholesaling the investment, thus typically delivering better value investments into the Fund. This is because the investments within the Fund do not contain the combined cost usually associated with retail structured products outlined above, not least because unlike a retail plan where there may be hundreds of individual investors, the Fund is the only investor. Secondly, this facilitates an element of price competition where the Investment Manager can look to secure the best price for a given investment style and pay-off, which may result in the bank’s dealing charges being reduced. Thirdly, it would be the norm that investors can access the Fund at the net asset value (NAV), meaning that there are no costs for buying or selling the fund as there is no bid-offer spread. One exception to this is when the directors of the Fund apply an Anti-Dilution levy, typically only on large withdrawals (in excess of 5% of the Fund’s NAV) and only when necessary to protect the interests of investors remaining within the Fund.
The Fund’s fees are capped at 1% per annuum of the Net Asset Value of the Fund. The daily price of the Fund is net of fees deducted from the NAV. For further information in relation to the fees of the Fund please refer to the Fund information available at UKDSF.com/Literature
Investment into the Fund through a platform will also incur ongoing platform charges which differ between platform provider and in addition to this, explicit adviser charges may also be levied by the appointed intermediary. The Fund is available on many UK platforms currently. To see which platforms the Fund is available on, please visit: UKDSF.com/HowToInvest
If you would like to know more about the Lowes UK Defined Strategy Fund, please visit the Fund website UKDSF.com/Literature for the Key Investor Information Document (“KIID”), Prospectus, and Supplement or call Lowes Investment Management on 0191 281 88 11.
The Lowes UK Defined Strategy Fund is a sub-fund of the Skyline Umbrella Fund ICAV and is regulated by the Central Bank of Ireland. The KIID, Prospectus, and Supplement can be accessed by visiting UKDSF.com/Literature and are only available in English.
Lowes Investment Management Ltd, Fernwood House, Clayton Road, Newcastle upon Tyne, NE2 1TL. Authorised and regulated by the Financial Conduct Authority.