A little over two years ago AMP Capital NZ introduced three new low-cost index fund for Kiwi investors. They were the;
- NZ Shares Index Fund with a management fee at 0.33% and Buy/Sell spread of 0.10%
- All Country Global Shares Index Fund with management fee at 0.38% and a Buy/Sell spread 0.15%
- Hedged Global Fixed Interest Index Fund with a managed fee at 0.39% and a Buy/Sell spread 0.10%
The AMP NZ Share index funds is a similar fund as the Smartshares NZ Top 50 ETF, but at a cheaper rate- there is some difference between the two. The All Country Global Share Index fund is a similar class of fund like the Vanguard fund but structured as a PIE fund- so you don’t have to deal with foreign investment tax.
Overall- the funds looked attractive- all with fairly low management fees and a small buy/sell spread. I switched my regular investing in the Smartshares NZ Top 50 over to the AMP NZ share Index fund pretty soon after- figuring that the buy-sell spread of 0.1% wouldn’t affect a long term investor as much as the difference in management fee (0.33% compared to 0.50%).
A Note on Buy-Sell Spread
So AMP charges a Buy-Sell spread on their fund. What exactly is a buy-sell spread?
You can think of a buy-sell spread is a fee you pay whenever you deposit money to invest in fund units- or when you sell fund units. Sometimes they are also called Establishment fees or Contribution fees, and Withdrawal fees or Exit fees.
Some fund managers charge buy-sell spread to make sure that any transaction costs incurred from you as an investor entering or exiting a fund are paid by you and not the other investors in the fund, or the fund manager.
I prefer simpler fee structures such as Smartshares as I think it better because it is easier to understand. Other fee structures are easier for fund managers to hide in the small print. But- buy-sell fees can be beneficial to you if you are a long term investor.
- Each investor bears the cost of any buying or selling of their shares in the fund- which in turn allows the fund manager to charge a lower fund management fee- but it doesn’t guarantee that the fee will be lower- in the case of AMP they have definitely lowered the fund management fee.
- If you are investing for the long term the buy and sell fee-only affect you when you deposit your money- and then again in a decade or two later when you cash out- so overall the management fee has a more significant effect on fees paid.
The downside to buy-sell fees is that they can change at any time without notice to the investors- (if this is disclosed in the fund’s Product Disclosure Statement). And to be honest, that was not a risk that I considered when I started investing in the AMP NZ index fund two years ago. That the buy-sell fees could change at any notice- So take note.
You should also note that a buy-sell spread can be disclosed to you as a percentage the way that AMP does it, or it can be in the difference between the unit purchase price and the unit sell price. This is why it’s sometimes called a spread.
Say you had a unit fund which is currently at $1 per unit. The buying price is $1.0007 and the selling price is $0.9993. That represents a buy-sell spread of 0.07%. This is how the Vanguard fund on InvestNow works. There is a buy price and a sell price.
This is exactly the same as when you go to convert currency at the bank. You normally pay a fee as a percentage of the money you want to exchange- and on top of that, the bank charges you a spread rate. So to avoid that- I would suggest you use transferwise which doesn’t charge a spread- and charges a very low fee.
AMP Increases Their Buy-Sell Spread
In April 2020, AMP changed the buy-sell spread of all their funds. AMP determine their buy/sell spreads based on what they consider to be a fair amount payable in regards to expected transaction costs. Details below.
|Old Buy/Sell Spread
|New Buy/Sell Spread
|NZ Share Index Fund
|Hedged Global Fixed Interest Index Fund
|All Country Global Shared Index Fund
|Australasian Property Index Fund
So what does that mean for my investments? I have been investing in the AMP NZ Share Index fund and Australasian Property Index since Marc 2018. And investing in the All Country Global Share Index fund since November 2019.
The first positive is that the All Country global share index fund buy-sell spread has gone down. So that is good for me.
But-should I switch from the AMP NZ top 50 back to the Smartshare fund? And should I switch from the AMP Australasian Property Index fund to the Smartshares NZ Property fund?
The first thing I’ll say is that switching the funds that I have already invested in AMP is not a smart idea- since they have been invested using the old buy fee- and they currently have a lower management fee than the Smartshare equivalents. But what about my regular investments from now on?
Well- I suspect over the long run the lower management fee will still trump the buy-sell spread. To get a better idea, though, let’s run some simulations.
AMP Index Funds vs SmartShares ETFs
I ran the numbers to compare the AMP NZ Index fund with a management fee of 0.33% and buy-sell spread of 0.44% against the SmartShares NZ Top 50 exchange-traded fund with a management fee of 0.50% for an investor who is regularly contributing $100 per month.
To simulate some “more realistic” returns I took the data from the NZX 50 gross index from 2002 to May 2020.
At first glance- there doesn’t seem to be much of a difference- Graph below.
Oh and by the way- do you see the impact of Covid-19 on that graph. I don’t think it looks as bad as you would think when investing over two decades- time will tell.
But to get a better idea- lets look at total returns at the end of 5, 10, 15, and 17.4 years.
|SmartShares NZ Top 50
|AMP NZ Share Index
After 5 years you’d be better off with SmartShares, but if you were to invest for 10 years or longer- which you should be aiming for if you are investing in share funds- then the AMP fund is cheaper.
You can calculate the absolute longest time for the AMP NZ Share Index to beat the Smartshares NZ Top 50 ETF by comparing the two without any returns. This is the absolute longest time it will take for the AMP fund to beat the Smartshare fund in terms of fees. The graph of balances ratios over time is below;
With the old buy-sell spread it would take at worst 2 years for the AMP fee structure to beat the SmartShares fee structure. With the new buy-sell spread of 0.44% at worst, it takes 10 years for the AMP fee structure to beat the SmartShares fee structure.
The SmartShares balance is higher at the beginning as the 0.44% buy spread charged on AMP does eat into the balance early on. However, since AMP charge less on management fee, more money stays in the fund over the long term, which can generate more return for you the investor.
In the end, AMP NZ Shares Index Fund will beat the SmartShares NZ Top 50 ETF. The longest period of time this will take is 10 years- this will decrease with better investment returns. But the difference between the two is not that big, we are talking about 0.7% after 15 years for the real data simulation. So if you’re investing in the Smartshares NZ Top 50 fund you shouldn’t drop everything and switch now.
You shouldn’t be wanting to try and ‘time’ the market- so the buy-sell spread should only affect your decision as much as the management fee should. If you are timing the market the AMP NZ Share Index fund will cost you more fees.
However, if you are aiming to optimise your returns over the long term, AMP is still the better choice- even with the increased spread rate. If you are on lower prescribed investor rate you should probably consider switch over to AMP.
As I mentioned at the top- I invest in AMP funds thought InvestNow. And even though I’m not overly happy about the increase in buy-sell spread, it still makes sense for me to stick with the AMP NZ Share index fund for now as I am planning on investing for more than 10 years.
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