ACTIVELY MANAGED FUNDS
In an actively managed mutual fund, a fund manager (or managers) decides which securities are bought and sold within a fund. The aim is to achieve the highest possible return for the fund's investors.
So that fund investors can better assess the success or failure of an investment fund, it is usually continuously measured how a fund performs compared to a benchmark index (also known as a "benchmark") minus costs the corresponding fund can be compared as well as possible in terms of the investment topic.
Key points
- Fund management decides on stock selection
- Goal: To perform better than the benchmark index
- High administration costs
Here is an example to explain better:
With the actively managed fund XY, the fund manager has the task of investing the fund money in large German stocks. In such a case, the investment fund can best be compared with the most important German stock index DAX.
On large stock exchange portals , one can easily find out, among other things, against which benchmark index a fund "competes". For example, if you call up a specific equity fund on finanztreff.de , you can find out the name of the respective benchmark index under “Fund performance” below and how the fund has performed against it in recent years.
Active funds cause increased administration work and thus also higher costs for the fund investors. This is because fund management needs to invest a great deal of time, research and resources to be successful.
The often high transaction costs for shifts within the fund (when the fund manager buys or sells securities), fund operating costs (information brochures, advertising, etc.) and other cost items make actively managed funds more expensive.
Fund costs: What is TER? Which fund fees are missing?
As a fund newcomer, sooner or later you ask yourself the question:
What does a fund cost? The answer: It differs from fund to fund. Therefore, it is not so easy to get an overview in the confusion of fund costs.
But there's one metric that makes it easier for investors to understand fund fees and expenses. It is "TER" and stands for the abbreviation of "Total Expense Ratio".
Total Expense Ratio Definition: What is "TER" Exactly?
This is a key figure in percent that expresses how high the costs of a fund are per year.
Example: There are fund shares worth 5000 euros in a securities account and the TER is 1%. In this case, one would have to reckon with fund costs of 50 euros each year. But there's a catch. Not all costs caused by fund purchases are included in the TER indicator!
Which fund cost components are included in the TER?
- Fund management costs or administration fees (of course, the fund managers want to be paid, especially the actively managed funds)
- Custody bank fee (this does not mean the custody account management costs of the investors. Instead, these are custody account fees of the fund companies, as they (mostly) are not allowed to carry out the custody account management themselves)
- Fund operating costs (costs for fund prospectuses, advertising, etc.)
- Other possible fund costs
Which cost items does the TER indicator not include?
- Transaction costs for securities shifts that occur within a fund (of course, if the fund manager buys or sells securities, there are fees, especially for actively managed investment funds)
- Success-based commissions or "performance fees" (this is a kind of success bonus for the fund manager, which is sometimes calculated)
- Redemption fee or "disagio" (sometimes the fund company charges fees if you want to get rid of the purchased fund shares)
- Custody account management fee (now free of charge via the Internet with many providers
- Fund trading costs that you have to pay as an investor for buying or selling a fund, for example with an online broker (these fees have to be paid especially for ETF funds that are traded on the stock exchange).
- Issue surcharge or "agio" (the issue surcharge is primarily due for actively managed funds and usually not for ETFs. (Some banks do not charge an issue surcharge for many active funds.)
- Spread (with passively managed ETFs there is usually no front-end load. Instead there is the so-called "spread".
Further information on TER and fund costs:
- The costs just listed do not necessarily apply to every investment fund, or the level of costs varies from fund to fund
- Some of the costs only apply once (e.g. front-end load or spread) and others regularly (fund management costs around once a year)
- The average TER for equity funds is between 1 and 2 percent. With ETFs, bond funds, open-ended real estate funds, it is usually less than one percent.
- The German Investment Act stipulates those financial institutions must state the TER. This applies to funds that have a license in this country.
- There is also the little-known key figure "RTER" or "realTER", which means "Real Total Expense Ratio" in full. The RTER is more accurate than the normal TER, as it also includes trading costs, performance fees and other costs. However, this key figure is rarely found in fund information.
Conclusion
An active fund is a mutual fund where management makes compositional decisions. Extensive market analyzes are carried out for investment decisions to identify attractive profit potential. The aim of active funds is to outperform comparative values such as an index. There are many active funds that are dedicated to a wide variety of topics and invest the investors' capital accordingly. However, the management always decides directly in which title to invest. On the other hand, there are passive funds that only try to replicate an index. Since a high level of research is required for market research, active funds sometimes fallvery high management fees and other costs that should be considered when measuring performance.