When it comes to the financial world, you will find one acronym after another and be expected to understand what is going on. A company I used to work for, used to talk about ‘Three Letter Abbreviations ‘or TLA’s; itself a TLA; coming from a company whose own name was an FLA, a ‘Four Letter Abbreviation’ (also working fine for ‘Five Letter Abbreviation’). I am just preparing you for what is to come, as you might notice one or two TLA’s / FLA’s coming your way.
This is because this month I was given a choice of two topics; the cost of investing and ethical investing, since these have been the most popular subjects of enquiry.
Both being investing related, I felt I could cover both, very cosily in one.
When it comes to investing in France, most individuals will use a well know structure known as an assurance vie (itself, not an investment, just a wrapper). This is for tax and inheritance reasons, which are hard to beat any other way, not that I am not looking to cover that here.
I will, however, add that I seriously looked at how to set things up another way, due to frustrating administration, cost and flexibility on what goes inside. The problem is that having run mountains of analysis, the use of an assurance vie was so fiscally advantageous it was impossible to exclude. So began the mission of how to reach utopia, whilst using these unruly Jurassic beasts.
One of my frustrations, was the difficulty in getting ETFs (your first TLA) also known as Exchange Traded Funds. They are very low cost compared to UCITS / a SICAV (your first FLA’s), which I will simplify by describing them as being like unit trusts. Exchange Traded Funds are, like their name points out, traded on the stock exchange, so are, in effect, shares, so may not be ‘directly’ traded within an assurance vie.
Keep an Eye on the Ongoing Charge Figure (OCF)
The attraction is to do with the OCF or Ongoing Charge Figure, which tells you the total cost of ownership of a fund, in the same way that APR (Annual Percentage Rate) tells you about the rate of a loan i.e. with every possible charge, fee and cost built in.
The cost of a fund used to be detailed just as the AMC (Annual Management Charge) and that was all that anyone showed you. This is now unacceptable and the OCF must be shown. We have seen instances where the AMC of a fund is 1%, but the OCF was almost 4%, so around 3% in hidden charges!
All kinds of things can be hidden by just using the AMC and we have seen many advisers still using only that, so that they can hide exorbitant and undisclosed commissions, so always make sure the OCF is clearly shown.
Access to ETFs within an assurance vie is normally possible in three ways:
- Buy a managed fund (a SICAV) with ETFs inside
- Set up a dedicated fund, appointing a manager
- Just use trackers with no management of any kind
The first two negate the whole point, as active management is happening in both and significant cost comes with this.
The third is a rudderless ship and leaves the investor scratching around for the right thing to track. Moreover, how is it tracking? This point is seemingly understood by few.
Managing a portfolio by Evidence Based Investing or Factor Based Investing
Another way is to manage a portfolio to a proven algorithm, such as EBI (Evidence Based Investing) and / or FBI (Factor Based Investing) removing management and cost, using super low-cost ETFs in line with this. This way, it is possible to access a truly global portfolio with assets so diverse, holdings can number over 20,000, yet with an OCF of around half a percent.
If you think this all sounds a bit new age and the next fad doomed to failure, EBI has existed since 1956 and won several Nobel prizes for economics with a history of always being successful for the long-term investor. How many funds / fund managers can make the same claim? Not all fund managers lose their mojo in the way Neil Woodford did, but not many beat the market, even before applying their significant charges, so why pay them so much money to try?
What is also interesting is the availability of ESG (Environmental, Social and Governance). This is indeed a new buzz word (or TLA) of the day. This goes beyond ethical funds (merely avoiding so called “sin” stocks, such as tobacco, weapons, gambling and alcohol) and into responsible investing, looking at all aspects as to how you money is used, beyond how money is ‘directly’ invested, with companies having to prove that their supply chains also act in a responsible manner.
Conclusion About the Cost of Investing
In general companies that care about how they are perceived tend to be in it for the long term and will behave and do things the right way, avoiding scams and scandals. My point is that, far from there being a cost or penalty for the investor, they are avoiding potential losses by avoiding companies who do harm.
The focus of ESG is by applying “filters” to certain stocks or funds. A company may offer a fund, one without a filter and another with; merely filtering out those companies who are not acceptable under ESG rules. What decent human being would not want a filter to weed out evil practices, like companies using child slavery?
Stronger filters may do more than just filter out, but filter in. This means adding in companies that do good, investing in sustainability, low carbon energy, health or water, which have a long-term potential to deliver attractive returns.
I am happy to report that all this is possible, inside a French assurance vie in a range of currencies. The French market is clearly evolving, and in a positive direction!
This article was first published in the Connexion in February 2020