Changes to the way we report LF Prudential fund costs and charges
What has happened to LF Prudential funds’ costs and charges?
On 7 May, Link Fund Solutions (LFS) updated the funds’ Ongoing Charge Figures (OCFs) in the published KIIDs. Here we help you understand what’s happened and why.
Why did LFS update the OCFs?
This is a normal process to capture any change in the variable costs of a fund on a semi-annual basis following the publication of the funds' interim or final annual Report and Financial Statements.
Why did the OCFs increase?
(See below for more details on the main charges included in the OCF)
The annual management charge covering management, administration, fund accounting, transfer agency hasn’t changed.
Other charges and expenses such as custodian, depository, audit, registration and regulatory fees have been updated to reflect the actual spend over the financial reporting period, but this hasn’t been a substantial change.
The main driver for the increase has been an increase in the synthetic component of the OCF (see below for more details on underlying funds and synthetic OCF). This has not been the result of new or more expensive underlying funds but driven by a different disclosure methodology used by the fund accountant State Street for underlying closed-ended vehicles. State Street has applied the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation methodology. Until now, they had used the UCITS methodology.
What is the impact on the charges and fund performance?
It's important to understand that even though the disclosed OCFs of the LF Prudential funds have increased, the funds don’t cost more. Also, LFS and Prudential are not charging more. The industry guidelines under UCITS Regulation regarded closed-ended funds as listed equities with no requirement to disclose an OCF and therefore they added no cost to the calculation of the LF Prudential funds’ underlying OCFs.
Net performance is not impacted. These vehicles have been part of the funds’ holdings before the change. It is a requirement under PRIIPs Regulation to include the costs reported by closed-ended funds, but this doesn’t change their historic performance or our view on the benefits of investing in them.
What charges are included in the OCF?
The following charges are normally included in the OCF (the list is not exhaustive):
- Management fees
- Fund accounting and valuation fees
- Shareholder service providers, such as the transfer agent
- Depositary and custodian fees
- Other charges and expenses such as registration fees, regulatory fees, audit fees, payments to legal and other professional advisers.
- Where a fund invests a proportion of its assets in other Collective Investment Undertakings (CIUs), the ongoing charges incurred in the underlying CIUs.
The OCF doesn’t include entry and exit fees, commissions, performance fees, trading and transaction costs, which are disclosed separately.
How are the OCFs of an underlying CIU taken into account? What is synthetic OCF?
The OCF of each underlying CIU is pro-rated according to the proportion of the fund’s net asset value (NAV) which that CIU represents (at the date at which the OCFs are taken). All the pro-rated OCFs are added to the OCF of the investing fund itself, thus presenting a single total (a ‘synthetic’ OCF).
For example, if 10% of the top fund’s NAV is invested in an underlying fund with an OCF of 0.5%, then 0.05% (the result of 10% x 0.5%) is added to the top fund’s OCF.
How are closed-ended funds different? What has been their impact on synthetic OCF?
Closed-ended funds issue a fixed number of shares which are traded at a discount or premium to NAV. Because of this, historically, industry under the UCITS Regulation interpreted the CIU definition to exclude closed-ended vehicles, such as investment trusts. Therefore, they were treated as listed securities and not captured in the synthetic OCF.
However, when the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation came into force in 2018, it took a different approach and regarded closed-ended funds (such as Investment Trusts) as CIUs.
How are closed-ended funds relevant to LF Prudential funds’ synthetic OCF?
The LF Prudential funds have holdings in investment trusts, which are closed-ended, and so the synthetic OCF calculation is relevant to our proposition.
Why do we use investment trusts in the LF Prudential funds?
Investment trusts are perfectly suited for investing in alternatives (asset classes such as infrastructure, private equity, hedge funds) without worrying about their liquidity because investment trusts have listed shares, which can be traded.
Why is HMT’s recently announced PRIIPs exemption not relevant?
The Investment Association (IA) have advised that the exemption applies to the requirement for funds to produce a PRIIPs KID. There is no change to IA’s Guidance to follow PRIIPs methodology on cost and charges disclosure.
Why have LFS and State Street implemented it now?
IA issued its guidance last year and State Street have implemented it for the LF Prudential funds following the publication of the funds’ Interim Report and Financial Statements.
Does this impact only the LF Prudential funds?
We expect all IA members to follow IA’s guidance, but the impact will depend on the level of holdings of close-ended funds in our peers’ propositions.