List the costs that lower your return but do not show up in the headline expense ratio.
Open the latest annual or semi-annual report for a fund you hold and find its turnover ratio. Turnover points to one of several costs that lower your return but are not included in the fund's expense ratio.
The expense ratio is the best single cost figure you have. As Lesson 2.2, "Yearly charges: management fee, expense ratio and trailer fee", explained, it covers the cost of running the fund. It is not the full cost of holding the fund. Arjun compared two funds with almost the same expense ratio that tracked similar markets, and he expected them to perform almost the same. Over three years, one trailed the other by more than the difference in their fees. Something cost that fund more than its expense ratio showed, and that is usually the case.
Most of these other costs can't be turned into a precise yearly percentage. That is acceptable. The goal is to know they exist and which ones apply to you.
The expense ratio usually leaves out the fund's own trading costs: broker commissions, transaction taxes in some markets, and the gap between the prices at which the fund buys and sells. These come directly out of the fund's assets, so they lower the NAV like any other cost, but they are not added to the expense ratio. A fund that trades more pays more trading costs.
The best clue to how much a fund trades is its turnover ratio, roughly the share of the portfolio bought and sold in a year. A low-turnover fund holds most positions for years. A high-turnover fund may replace most of its holdings within a year and pays trading costs on each change. Index funds tend to have low turnover because they trade only when the index changes or when money flows in or out. Active funds range from low to very high turnover.
Most factsheets do not show the turnover ratio, so look in the annual or semi-annual report. If a fund reports high turnover, treat its expense ratio as an understatement of what you pay.
Funds hold some cash to pay investors who want to sell and to wait for opportunities. In most years that cash earns less than the market. When markets rise, the cash does not rise with them, so the fund returns less than it would have if fully invested. This shortfall is cash drag.
Say a fund holds 5% of its money in cash (an example figure). The cash earns 3% a year, and the shares the fund holds return 10% that year. The cash earns 7 percentage points less than it would have in shares (10% - 3% = 7 percentage points). The drag on the whole fund is 5% of that gap, which is 0.35 percentage points. The general calculation is (share return - cash return) x share of the fund held in cash = drag on the whole fund.
In a falling year, cash helps the fund's return, so cash drag is mainly a cost in rising markets. Over long periods, rising markets have been more common than falling ones. No document lists cash drag as a cost, but the factsheet usually shows how much the fund holds in cash, and you can check whether that share stays small.
Three costs sit outside the fund's own accounts, so they can never appear in its expense ratio.
Currency conversion applies when you invest Singapore dollars into a share class priced in another currency. Your bank, platform or robo-advisor converts the money at its own rate, and the gap from the market rate is a cost. As Lesson 4.3, "What a robo-advisor really costs", noted, you pay it on the way in and again on the way out.
Withholding tax on dividends applies because many countries tax dividends paid to foreign investors at source. How much is lost depends on where the fund is domiciled and which tax treaties apply. The fund receives dividends after that tax, so its return is lower than the index it tracks, which may be calculated differently. Check the current position in the fund's own documents or on the relevant tax authority's website. Lesson 3.3, "Domicile and withholding tax on dividends", in the course "Build and run an ETF portfolio", covers withholding tax and fund domicile.
Channel charges are platform fees, wrap fees and advisory fees. They come out of your account, not the fund, so the expense ratio never shows them. Lesson 3.2, "Fund platforms: lower charges, more of the work on you", covered these fees.
Some funds charge a performance fee on top of the management fee, usually a share of any return above a stated hurdle or benchmark. Because it depends on returns, it is not a fixed percentage, and many factsheets do not show it in the headline cost.
The prospectus explains how it is calculated: the hurdle, the share taken, how often it is measured, and whether the fund must first make up past losses before charging again. If your fund has a performance fee, read that section closely, because those details decide how much it can take in a good year.
Wei Ling went through each of these costs for the fund she holds, and you can follow the same order. She found turnover in the annual report, and it was moderate. Her factsheet showed about 3% in cash, so she checked that the share stays small. She has no currency conversion cost, because she pays in Singapore dollars for a Singapore dollar share class. Withholding tax applies to dividends from the fund's holdings, though the amount is not stated. Her bank charges no platform fee, and the fund has no performance fee.
For your own fund, check turnover in the annual or semi-annual report, the cash holding on the factsheet, whether the share class currency differs from the money you pay in, whether withholding tax applies to dividends from the fund's holdings, whether your channel charges platform, wrap or advisory fees, and whether the fund charges a performance fee. If it does, read the prospectus section on the hurdle, the share taken, how often it is measured, and whether past losses must be made up first.
In the activity below you will find your fund's turnover and list the costs outside its expense ratio that apply to you.
Pick one fund you hold. Look up its turnover in the annual report, then list the costs outside the expense ratio that apply to you.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).