Understanding Earnings per Share and its Impact on Stock Price
BY STOCK RESEARCH PRO • MAY 9TH, 2009
A company’s Earnings per Share (EPS) represents the portion of the company’s earnings (after deducting taxes and preferred share dividends) that is distributed to each share of the company’s common stock. The EPS measure gives investors a way to compare stocks in an “apples to apples” way.
The Importance of Earnings per Share in Evaluating Stocks
Fundamental stock evaluation revolves primarily around the earnings a company generates for its shareholders. Earnings, of course, represent what the company makes through its operations over any particular period of time. While smaller, newer companies may have negative earnings as they establish themselves, their stock prices will reflect future earnings expectations. Larger companies are judged mainly on the earnings measure. Decreased earnings for these companies are likely to negatively impact their stock prices.
The Earnings Cycle
Earnings are reported every calendar quarter with the process beginning shortly after the end of a fiscal quarter (a three month period).
Calculating Earnings per Share
The formula for earnings per share can be written as:
(Net Income – Preferred Stock Dividends) / Average Outstanding Shares
Because the number of shares outstanding can fluctuate over the reporting term, a more accurate way to perform the calculation is to use a weighted average number of shares. To simplify the calculation, though, the number used is often the ending number of shares for the period.
Investors can then divide the price per share by the earnings per share to arrive at the price to earnings ratio (P/E Ratio) or “multiple”. This ratio gives us an indication of how much investors are willing to pay for each dollar of earnings for any particular company.
Basic v. Diluted Earnings per Share
In calculating the EPS, one of two methods can be used:
Basic Earnings per Share: Indicates how much of the company’s profit is allocated to each share of stock.
Diluted Earnings per Share: Fully reflects the impact the firm’s dilutive securities (e.g. convertible securities) may have on earnings per share.
Types of Earnings per Share
EPS can be further subdivided into various types, including:
Trailing EPS: Calculated based on numbers from the previous year
Current EPS: Includes numbers from the current year and projections
Forward EPS: Calculated based on projected numbers
Please note that most quoted EPS values are based on trailing numbers.
http://www.stockresearchpro.com/understanding-earnings-per-share-and-its-impact-on-stock-price
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
Friday 6 August 2010
Evaluating Company Management in Fundamental Analysis
Evaluating Company Management in Fundamental Analysis
BY STOCK RESEARCH PRO • APRIL 21ST, 2009
When evaluating a stock, many investors will look at the strength and effectiveness of company management as part of the due diligence process. The corporate scandals of recent years have reminded all of us of the importance of having a high-quality management team in place. The role of the management team, as far as investors are concerned, is to create value for the shareholders. While most investors see the significance of strong management, assessing the competence of an executive team can be difficult.
The Role of Company Management
A strong management team is critical to the success of any company. These are the people who develop the ongoing vision of the company and make strategic decisions to support that vision. While it can be said that every employee brings value, it is the management team that “steers the ship” through competitive, economic and the other pressures associated with running a company. In measuring the effectiveness of the management team the investor is able to determine how well the company is performing relative to its industry competitors and the market as a whole.
Assessing Management Performance
Some of the metrics a fundamental investor might use in measuring the effectiveness of company management might include:
Return on Assets: The ROA provides an indication of company profitability in relation to its total assets. Part of effective company management is the efficient leverage of company assets to produce earnings.
Return on Equity: The ROE measures net income as a percentage of shareholders equity. For shareholders, the ROE provides a means of measuring company profitability against how much they have invested. The ROE is best used to compare the profitability of the company (and company management, by extension) with other companies in the industry.
Return on Investment: The ROI measures the effective use of debt for the benefit of the company. Skillful use of debt resources by company management can play a significant role in the growth and prosperity of the company.
http://www.stockresearchpro.com/evaluating-company-management-in-fundamental-analysis
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
BY STOCK RESEARCH PRO • APRIL 21ST, 2009
When evaluating a stock, many investors will look at the strength and effectiveness of company management as part of the due diligence process. The corporate scandals of recent years have reminded all of us of the importance of having a high-quality management team in place. The role of the management team, as far as investors are concerned, is to create value for the shareholders. While most investors see the significance of strong management, assessing the competence of an executive team can be difficult.
The Role of Company Management
A strong management team is critical to the success of any company. These are the people who develop the ongoing vision of the company and make strategic decisions to support that vision. While it can be said that every employee brings value, it is the management team that “steers the ship” through competitive, economic and the other pressures associated with running a company. In measuring the effectiveness of the management team the investor is able to determine how well the company is performing relative to its industry competitors and the market as a whole.
Assessing Management Performance
Some of the metrics a fundamental investor might use in measuring the effectiveness of company management might include:
Return on Assets: The ROA provides an indication of company profitability in relation to its total assets. Part of effective company management is the efficient leverage of company assets to produce earnings.
A Return on Assets Calculator
Return on Equity: The ROE measures net income as a percentage of shareholders equity. For shareholders, the ROE provides a means of measuring company profitability against how much they have invested. The ROE is best used to compare the profitability of the company (and company management, by extension) with other companies in the industry.
A Return on Equity Calculator
Return on Investment: The ROI measures the effective use of debt for the benefit of the company. Skillful use of debt resources by company management can play a significant role in the growth and prosperity of the company.
http://www.stockresearchpro.com/evaluating-company-management-in-fundamental-analysis
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
The Importance of Retained Earnings
The Importance of Retained Earnings
BY STOCK RESEARCH PRO • JUNE 9TH, 2009
Retained earnings, also known as “accumulated earnings” or “retained capital” refer to the portion of net income the company retains as opposed to distributing those funds to shareholders in the form of dividends. A company’s retained earnings are typically reinvested into its core business or used to pay down debt. A company’s retained earnings (or retained losses) are cumulative from year to year with losses and earnings offsetting and reported in the company’s Statement of Retained Earnings/ Losses.
Calculate Retained Earnings
The formula to calculate retained earnings can be written as:
Retained Earnings = Beginning Retained Earnings + Net Income – Dividends
The formula simply adds net income for the period (or subtracts a loss) from the beginning retained earnings and then deducts any dividends paid for the period.
Interpreting Retained Earnings
The Statement of Retained Earnings
The Statement of Retained Earnings or Statement of Owner’s Equity is a basic financial statement issued by a company to outline the changes in the company’s retained earnings over the reporting period. Using net income for the period and other company financial statements, the statement reconciles the beginning and ending retained earnings for the reporting period. The statement of retained earnings uses information from the income statement and provides information to the balance sheet.
http://www.stockresearchpro.com/the-importance-of-retained-earnings
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
BY STOCK RESEARCH PRO • JUNE 9TH, 2009
Retained earnings, also known as “accumulated earnings” or “retained capital” refer to the portion of net income the company retains as opposed to distributing those funds to shareholders in the form of dividends. A company’s retained earnings are typically reinvested into its core business or used to pay down debt. A company’s retained earnings (or retained losses) are cumulative from year to year with losses and earnings offsetting and reported in the company’s Statement of Retained Earnings/ Losses.
Calculate Retained Earnings
The formula to calculate retained earnings can be written as:
Retained Earnings = Beginning Retained Earnings + Net Income – Dividends
The formula simply adds net income for the period (or subtracts a loss) from the beginning retained earnings and then deducts any dividends paid for the period.
Interpreting Retained Earnings
- Reinvestment of retained earnings can be an important source of financing for many companies.
- Many creditors will closely monitor a company’s retained earnings statement because the company’s policy regarding dividend payments to its stockholders can have a direct impact on its ability to repay its debt.
- The importance of retained earnings to investors is in understanding the level to which the company reinvests its earnings to fund growth and expansion. If, however, the company reinvests retained earnings without demonstrating significant growth, investors would probably be better off if the company had issued a dividend.
The Statement of Retained Earnings
The Statement of Retained Earnings or Statement of Owner’s Equity is a basic financial statement issued by a company to outline the changes in the company’s retained earnings over the reporting period. Using net income for the period and other company financial statements, the statement reconciles the beginning and ending retained earnings for the reporting period. The statement of retained earnings uses information from the income statement and provides information to the balance sheet.
http://www.stockresearchpro.com/the-importance-of-retained-earnings
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
Find Growth Stocks Through Fundamental Analysis
Find Growth Stocks Through Fundamental Analysis
BY STOCK RESEARCH PRO • AUGUST 15TH, 2009
Growth investing is one of the primary investing approaches investors may choose in finding worth stocks for their portfolio. Finding growth stocks is about seeking out those companies that show promise for high growth when compared to other stocks within their industry or the market as a whole. Growth investors are typically making qualitative judgments in finding the stocks with the best growth potential and are committed to a longer-term approach to stock investing than other types of strategies (e.g. technical investing). Most investors see a growth strategy as more of an art than a science as there is no guaranteed method for finding the best growth stocks.
Fundamental Analysis and Growth Investing
The growth investing approach is one of several methods of evaluation that fall within fundamental analysis, along with Value, Income, and GARP (Growth at a Reasonable Price) investing. While a growth investor employs fundamental analysis to assess the strength and viability of a company, a growth strategy places a greater emphasis on qualitative factors, including the company’s business model, the strength of its management team, business model and the overall prospects for the industry in which the company operates.
Steps to Find Growth Stocks
Look for financial strength: The first step to think about in choosing a good growth stock is in making sure that the company is and will likely remain financially viable. Looking at the company’s current ratio, for example, will give you an idea of whether the company will be able to pay its short-term debts.
Assess the company’s industry: The strategy for many growth investors starts with finding those industries that show the most promise for future growth, and then finding the company within that industry that is best positioned to emerge as the leader. A top-down investment strategy can help to identify the most promising industries for the near future.
Emphasize profitability: Make sure to look at the company’s profitability by examining its return on equity. ROE measures profitability and will tell you the level of profit the company is generating for its shareholders with the money they invest. Because earnings cannot exceed a company’s ROE, growth investors will look at the measure to as a means of determining growth potential.
________________________________________________________________
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
http://www.stockresearchpro.com/find-growth-stocks-through-fundamental-analysis
http://myinvestingnotes.blogspot.com/
BY STOCK RESEARCH PRO • AUGUST 15TH, 2009
Growth investing is one of the primary investing approaches investors may choose in finding worth stocks for their portfolio. Finding growth stocks is about seeking out those companies that show promise for high growth when compared to other stocks within their industry or the market as a whole. Growth investors are typically making qualitative judgments in finding the stocks with the best growth potential and are committed to a longer-term approach to stock investing than other types of strategies (e.g. technical investing). Most investors see a growth strategy as more of an art than a science as there is no guaranteed method for finding the best growth stocks.
Fundamental Analysis and Growth Investing
The growth investing approach is one of several methods of evaluation that fall within fundamental analysis, along with Value, Income, and GARP (Growth at a Reasonable Price) investing. While a growth investor employs fundamental analysis to assess the strength and viability of a company, a growth strategy places a greater emphasis on qualitative factors, including the company’s business model, the strength of its management team, business model and the overall prospects for the industry in which the company operates.
Steps to Find Growth Stocks
Look for financial strength: The first step to think about in choosing a good growth stock is in making sure that the company is and will likely remain financially viable. Looking at the company’s current ratio, for example, will give you an idea of whether the company will be able to pay its short-term debts.
Assess the company’s industry: The strategy for many growth investors starts with finding those industries that show the most promise for future growth, and then finding the company within that industry that is best positioned to emerge as the leader. A top-down investment strategy can help to identify the most promising industries for the near future.
Emphasize profitability: Make sure to look at the company’s profitability by examining its return on equity. ROE measures profitability and will tell you the level of profit the company is generating for its shareholders with the money they invest. Because earnings cannot exceed a company’s ROE, growth investors will look at the measure to as a means of determining growth potential.
________________________________________________________________
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
http://www.stockresearchpro.com/find-growth-stocks-through-fundamental-analysis
http://myinvestingnotes.blogspot.com/
Latexx 2Q net profit surges 89% to RM21.55m
Latexx 2Q net profit surges 89% to RM21.55m
Tags: Latexx Partners Bhd
Written by Surin Murugiah
Friday, 06 August 2010 13:20
KUALA LUMPUR: LATEXX PARTNERS BHD [] net profit for the second quarter ended June 30, 2010 surged 88.9% to RM21.55 million from RM11.41 million a year ago on the back of a 80.7% jump in revenue to RM134.48 million.
The company declared a second interim tax exempt dividend of 2.5 sen per ordinary share of 50 sen each. Earnings per share was 10.39 sen while net assets per share was RM1.04.
In a filing to Bursa Malaysia Securities on Friday, Aug 6, Latexx attributed the increase in revenue and profit to its recent capacity expansion and fine tuning of glove production lines coupled with aggressive marketing strategy as well as overall cost savings.
The company said it was confident that the growth in FY 2010 would be sustained in tandem with the growth of world demand for medical gloves in the health sector.
The strategy of increasing capacity and switching to a better mix of products coupled with more aggressive marketing efforts by penetrating into new markets will contribute to sustainable profitability, it said.
http://www.theedgemalaysia.com/business-news/171384-latexx-2q-net-profit-surges-89-to-rm2155m.html
Bullbear Stock Investing Notes
Tags: Latexx Partners Bhd
Written by Surin Murugiah
Friday, 06 August 2010 13:20
KUALA LUMPUR: LATEXX PARTNERS BHD [] net profit for the second quarter ended June 30, 2010 surged 88.9% to RM21.55 million from RM11.41 million a year ago on the back of a 80.7% jump in revenue to RM134.48 million.
The company declared a second interim tax exempt dividend of 2.5 sen per ordinary share of 50 sen each. Earnings per share was 10.39 sen while net assets per share was RM1.04.
In a filing to Bursa Malaysia Securities on Friday, Aug 6, Latexx attributed the increase in revenue and profit to its recent capacity expansion and fine tuning of glove production lines coupled with aggressive marketing strategy as well as overall cost savings.
The company said it was confident that the growth in FY 2010 would be sustained in tandem with the growth of world demand for medical gloves in the health sector.
The strategy of increasing capacity and switching to a better mix of products coupled with more aggressive marketing efforts by penetrating into new markets will contribute to sustainable profitability, it said.
http://www.theedgemalaysia.com/business-news/171384-latexx-2q-net-profit-surges-89-to-rm2155m.html
Bullbear Stock Investing Notes
Calculate the Estimated Dividend Growth Rate for a Stock
As most investors know, mature companies tend to pay dividends, sending checks that represent a small fraction of the company’s profits to shareholders on a quarterly basis. While some investors prefer the volatility and excitement that often accompanies small-cap stock investing, the combination of capital gains through stock price appreciation along with income through dividends can be very attractive. Add to this the possibility of dividend growth and the case for investing in these more mature companies becomes quite compelling.
The key for shareholders is that, as long as the company maintains a constant dividend payout ratio as it grows, that payout ratio represents a continually growing amount.
Click Here for Dividend Payout Ratio Calculator
Estimating Dividend Growth Rates
What is Dividend Growth Rate?
The dividend growth rate refers to the annual rate of growth that a stock offers over a period of time. A history of solid dividend growth can provide an indication that continued dividend growth is likely for that company into the future. As the dividend grows, shareholders can count on the stock price to rise because the more income it produces the more valuable the stock becomes- a scenario referred to as a “double dip”.
Watching the Dividend Payout Ratio
The dividend payout ratio is the proportion of company earnings that it allocates to paying dividends to shareholders. The ratio offers an indication as to how well company earnings support its dividend payments. In general, more mature companies offer higher payout ratios.
The formula for the dividend payout ratio can be written as:
Dividend Payout Ratio
= Annual Dividend per Share / Earnings per Share
The key for shareholders is that, as long as the company maintains a constant dividend payout ratio as it grows, that payout ratio represents a continually growing amount.
Click Here for Dividend Payout Ratio Calculator
Estimating Dividend Growth Rates
It follows then that a company’s dividend growth rate can be estimated by projecting its earnings growth. In estimating the dividend growth rate, it is assumed that the return on equity and dividend payout ratio are held constant.
The formula to estimate the dividend growth rate can be written as:
Dividend Growth Rate
= Plow Back Ratio x Return on Equity
The plow back ratio is simply (1- dividend payout ratio)
Bullbear Stock Investing Notes
http://www.stockresearchpro.com/calculate-the-estimated-dividend-growth-rate-for-a-stock
Bullbear Stock Investing Notes
http://www.stockresearchpro.com/calculate-the-estimated-dividend-growth-rate-for-a-stock
World Cup drives Guinness’ 4Q profit
World Cup drives Guinness’ 4Q profit
Tags: fourth quarter | GAB | world cup
Written by Yong Min Wei
Thursday, 05 August 2010 12:03
KUALA LUMPUR: Guinness Anchor Bhd’s (GAB) net profit for the fourth quarter ended June 30, 2010 (4QFY10) rose 30.2% to RM35.66 million from RM27.39 million a year earlier, boosted by higher sales from commercial activities during the 2010 FIFA World Cup.
The leading brewer’s revenue climbed 11.7% to RM308.71 million from RM276.27 million, while basic earnings per share (EPS) came in at 11.81 sen versus 9.07 sen previously.
GAB proposed a final dividend of 35 sen per 50 sen share (tax exempt) under a single-tier system for the year ended June 30, 2010, bringing total dividend for the year to 45 sen. Its net asset per share stood at RM1.56 as at June 30.
For FY10, the group reported a record RM1.35 billion in revenue versus RM1.28 billion in FY09 while full year pre-tax profit rose 7% to another record of RM205.33 million from RM191.91 million. Net profit rose 7.5% to RM152.69 million from RM141.99 million, while EPS rose to 50.54 sen from 47 sen.
GAB managing director Charles Ireland said the group had achieved nine consecutive years of growth in revenue and profit. He said the group’s market share in the malt liquor market (MLM) had been improving every year and that it was currently controlling close to 60% share compared with the low 40%-plus levels five years ago.
“This track record really does show what an exceptional blend of people, brands, and performance we have in GAB,” he told a press conference yesterday.
“It is fitting that in the year of the tiger, Tiger beer is leading our growth. Guinness, Heineken, Kilkenny and Anchor also continue to contribute to our good performance,” Ireland said.
He said one of GAB’s core strengths was in its portfolio of international brands, adding the management had substantially invested in building brand equity to strengthen its value proposition to consumers.
He said GAB would be introducing a new range of products in the MLM market in the next six months but was tight-lipped on the number and origin of products except that they involved beer and stout.
Nevertheless, Ireland noted that the MLM was sensitive to overall economic conditions and excise duties although the group was optimistic that it would perform satisfactorily in FY11.
“As Malaysia has the second-highest excise duty on alcoholic products in the world, the industry hopes there will be no increase in excise duties in the coming Budget 2011,” he said.
On capital expenditure (capex), Ireland noted GAB spent in the region of RM40 million in FY10 and that it was expecting to spend about RM50 million in FY11, the bulk of which would be invested to supply the “highest quality” beer and stout as well as to ensure its brewery conformed to international standards of production.
GAB’s share price yesterday added eight sen to close at RM8.10 with 16,200 shares traded.
This article appeared in The Edge Financial Daily, August 5, 2010.
Tags: fourth quarter | GAB | world cup
Written by Yong Min Wei
Thursday, 05 August 2010 12:03
KUALA LUMPUR: Guinness Anchor Bhd’s (GAB) net profit for the fourth quarter ended June 30, 2010 (4QFY10) rose 30.2% to RM35.66 million from RM27.39 million a year earlier, boosted by higher sales from commercial activities during the 2010 FIFA World Cup.
The leading brewer’s revenue climbed 11.7% to RM308.71 million from RM276.27 million, while basic earnings per share (EPS) came in at 11.81 sen versus 9.07 sen previously.
GAB proposed a final dividend of 35 sen per 50 sen share (tax exempt) under a single-tier system for the year ended June 30, 2010, bringing total dividend for the year to 45 sen. Its net asset per share stood at RM1.56 as at June 30.
For FY10, the group reported a record RM1.35 billion in revenue versus RM1.28 billion in FY09 while full year pre-tax profit rose 7% to another record of RM205.33 million from RM191.91 million. Net profit rose 7.5% to RM152.69 million from RM141.99 million, while EPS rose to 50.54 sen from 47 sen.
GAB managing director Charles Ireland said the group had achieved nine consecutive years of growth in revenue and profit. He said the group’s market share in the malt liquor market (MLM) had been improving every year and that it was currently controlling close to 60% share compared with the low 40%-plus levels five years ago.
“This track record really does show what an exceptional blend of people, brands, and performance we have in GAB,” he told a press conference yesterday.
“It is fitting that in the year of the tiger, Tiger beer is leading our growth. Guinness, Heineken, Kilkenny and Anchor also continue to contribute to our good performance,” Ireland said.
He said one of GAB’s core strengths was in its portfolio of international brands, adding the management had substantially invested in building brand equity to strengthen its value proposition to consumers.
He said GAB would be introducing a new range of products in the MLM market in the next six months but was tight-lipped on the number and origin of products except that they involved beer and stout.
Nevertheless, Ireland noted that the MLM was sensitive to overall economic conditions and excise duties although the group was optimistic that it would perform satisfactorily in FY11.
“As Malaysia has the second-highest excise duty on alcoholic products in the world, the industry hopes there will be no increase in excise duties in the coming Budget 2011,” he said.
On capital expenditure (capex), Ireland noted GAB spent in the region of RM40 million in FY10 and that it was expecting to spend about RM50 million in FY11, the bulk of which would be invested to supply the “highest quality” beer and stout as well as to ensure its brewery conformed to international standards of production.
GAB’s share price yesterday added eight sen to close at RM8.10 with 16,200 shares traded.
This article appeared in The Edge Financial Daily, August 5, 2010.
F&N 3Q earnings up 18.4% to RM70m
F&N 3Q earnings up 18.4% to RM70m
Tags: dairies | Fraser & Neave Holdings | Fraser Business Park | soft drinks
Written by Joseph Chin
Thursday, 05 August 2010 18:19
KUALA LUMPUR: Fraser & Neave Holdings Bhd posted net profit of RM70 million for its third quarter ended June 30, 2010, up 18.4% from RM59.12 million a year ago as it benefited from lower tax rate.
It said on Thursday, Aug 5 group revenue increased 7% to RM893 million, boosted by strong volume growth in soft drinks.
"Soft drinks revenue improved 26% with all main product portfolios registering commendable volume growth on the back of strong promotional activities around some major sport events such as the Thomas Cup and the FIFA World Cup," it said.
As for the dairies division, it saw a 3% decline due to lower exports for both Malaysia and Thailand operations. Property revenue was lower due to completion of Fraser Business Park – Phase II.
Group operating profit for the quarter improved 17% mainly due to volume growth of soft drinks which was partly offset by higher raw material prices of the dairies division.
F&N said group profit after taxation for 3Q of RM72 million was 35% above the same quarter last year. Group effective tax rate declined to 20% from 29% previously, benefiting from the tax incentives secured last year for the new dairy plant investment in Rojana, Thailand.
http://www.theedgemalaysia.com/business-news/171315-fan-3q-earnings-up-184-to-rm70m.html
Tags: dairies | Fraser & Neave Holdings | Fraser Business Park | soft drinks
Written by Joseph Chin
Thursday, 05 August 2010 18:19
KUALA LUMPUR: Fraser & Neave Holdings Bhd posted net profit of RM70 million for its third quarter ended June 30, 2010, up 18.4% from RM59.12 million a year ago as it benefited from lower tax rate.
It said on Thursday, Aug 5 group revenue increased 7% to RM893 million, boosted by strong volume growth in soft drinks.
"Soft drinks revenue improved 26% with all main product portfolios registering commendable volume growth on the back of strong promotional activities around some major sport events such as the Thomas Cup and the FIFA World Cup," it said.
As for the dairies division, it saw a 3% decline due to lower exports for both Malaysia and Thailand operations. Property revenue was lower due to completion of Fraser Business Park – Phase II.
Group operating profit for the quarter improved 17% mainly due to volume growth of soft drinks which was partly offset by higher raw material prices of the dairies division.
F&N said group profit after taxation for 3Q of RM72 million was 35% above the same quarter last year. Group effective tax rate declined to 20% from 29% previously, benefiting from the tax incentives secured last year for the new dairy plant investment in Rojana, Thailand.
http://www.theedgemalaysia.com/business-news/171315-fan-3q-earnings-up-184-to-rm70m.html
Thursday 5 August 2010
More than meets the eye to fund charges
As high costs come under scrutiny we break down the typical fees.
More than meets the eye to fund charges
The Telegraph's revelation that we pay an extortionate amount in fund fees – about £7.3 billion every year – piles on the misery for British savers grappling with jittery stock markets and low returns.
When shares are soaring, little attention is paid to the amount in fees that investment companies rake in. But when fund values are falling, the costs paid by investors account for a greater proportion of their total returns – and it gets noticed.
"Now we have consistently low inflation, charges represent a far higher proportion of any investment return than in years gone by," says Clive Waller at CWC Research, the financial analyst. "Charges matter."
Understandably, companies need to levy charges to cover their costs and return a profit. Even something as simple as sending out a policy statement costs money, particularly when they have tens of thousands of investors on their books.
Then there is the cost to the company of paying commission to salesmen and independent advisers. These are generally funded by customers, regardless of whether they buy direct from the fund management group or through an independent financial adviser.
Tom Stevenson, investment director at Fidelity, says: "Our portfolio managers are supported by hundreds of analysts, meeting companies, talking to their suppliers and customers and scouring balance sheets for the information that can give our clients an investment edge. This is a costly but, we believe, essential activity and it is reasonable that this should be reflected in the annual management charges of our funds."
But investors should check to see what they are being charged. If, as many experts predict, we are in for several years of subdued investment performance, it is important to look at more than just the annual management charge.
There is a raft of additional charges on both unit trusts and open-ended investment companies (Oeics). These include audit fees, dealing costs and servicing charges.
What is the annual management charge (AMC)?
This is the figure that is published on the fact sheet and is the fee that most savers – incorrectly – understand to be the amount they pay each year for the fund manager to run the fund.
Taking the typical AMC of 1.5 per cent, about two thirds of this is used to pay for research, wages and costs associated with physically managing the money within the fund. The remaining 0.5 per cent is paid out as "trail commission" to independent financial advisers or the fund provider each year for so-called "servicing costs".
Trail commission is a controversial charge. Critics argue that many advisers get this annual fee for doing next to nothing and question whether many deserve the remuneration, given that they do little to encourage their clients to switch out of perennial poor performing funds.
But the AMC doesn't tell the whole story on fund fees and charges – there is also the TER.
I've never heard of the TER. What does it stand for?
For a better idea of the cost of your fund, you should look out for the total expense ratio (TER). Unfortunately, investment fund companies are not obliged to reveal TERs and many will publish only the annual management fee, leaving investors with the mistaken impression that this is all they have to pay. It is not.
The TER takes into account dealing costs, stamp duty and auditors' fees as well as the annual management charge. You can often find TERs of more than 150 basis points above the annual management charge. Take Threadneedle Managed Income, for instance. Its AMC is just 0.25 per cent, which you may be mistaken in thinking is a bargain. However, the fund's TER is 1.77 cent.
So does the TER include all the costs that I pay?
I'm afraid not. The TER does not include the trading costs – the costs for buying and selling shares within the fund. The more active a manager is in trading the underlying portfolio, the higher these costs.
That said, investors have to expect some extra cost here: after all, you would be seething if your manager just sat on his backside all year. On average, trading costs can add another 1 per cent to your annual fees but some argue that managers buy and sell shares simply to rake in this extra revenue.
A higher TER will obviously cause a drag on performance. For example, a £7,200 fund investment growing by 7 per cent each year will reach £14,163 after 10 years, before charges. A fund levying an annual TER of 1.55 per cent would be worth £12,240 after 10 years, but a fund with a TER of 2.25 per cent would be worth be £788 less, at £11,452, according to Lipper, the fund analysts.
Can I compare the true costs of investing in different funds?
No. Trading costs range from about 0.09 per cent a year to one per cent. "The AMC is a quite useless figure; the TER is misleading because it is not total – it does not include dealing charges or, if it's a fund of funds, the charges on the underlying funds," says Mr Waller. "If the buyer knows exactly what the true cost is, he can compare fund manager performance against charges and make an informed decision."
How do fund charges vary?
Charges vary according to the type of fund and what it invests in. The fees levied on specialist funds, such as those investing in smaller companies, will almost certainly be a lot higher than those for funds that simply track indices, so-called tracker funds.
For example, the average UK equity fund has a TER of 1.6 per cent compared with the average corporate bond fund's TER of 1.15 per cent. Actively managed funds cost more to run than trackers because the latter are effectively managed by computer programs while the former incur the costs of researching individual stocks.
Mr Stevenson says: "Simplistic comparisons between the charges levied on actively managed funds and index-tracking or passive funds miss the point. The two investment approaches incur different levels of cost, so the question is not whether stock-picking funds should be more expensive than trackers (they are) but whether their higher charges are transparent and a fair reflection of the extra resources and effort involved."
So are cheaper funds better?
Not necessarily. It is fair to say that the lion's share of funds underperform time after time and many do not offer value for money.
The fund groups that charge the most argue that investors are better off paying extra for decent performance. However, a significant number of funds fail to deliver consistent above-average performance year in, year out, and if you are paying a high TER for dismal performance it is time for a rethink.
It is clearly worth paying a higher TER for consistent outperformance and a high TER does sometimes pay. Take Jupiter Merlin Balanced Portfolio. This popular selling fund has a TER of 2.3 per cent, which is higher than the average – yet it outperforms its peers regularly and is justifiably recommended by many investment advisers.
http://www.telegraph.co.uk/finance/personalfinance/investing/7923367/More-than-meets-the-eye-to-fund-charges.html
http://www.telegraph.co.uk/finance/personalfinance/investing/7923367/More-than-meets-the-eye-to-fund-charges.html
£7billion a year skimmed off our savings
More than £7.3billion a year is being “skimmed off” the value of Britons’ savings by City bankers and fund managers, an investigation by The Daily Telegraph has found.
City bankers and fund managers are 'skimming off' more than £7.3billion a year from the value of Britons' savings Photo: Getty
A range of questionable hidden fees and levies are being deducted from investments, making it difficult for a typical saver to make money from the stock market. Britain’s eight million investors are losing an average of £800 a year each to the hidden levies.
An investor putting £50,000 into a fund providing typical returns over 25 years would lose out on £108,000 because of unnecessary charges, said David Norman, a former chief executive of Credit Suisse Asset Management.
Customers have no way of claiming back their lost savings because fund managers are not doing anything illegal or beyond the rules. However, they are now likely to face increased scrutiny from regulators, while the Government could come under pressure to announce an inquiry to clean up the industry, which millions rely on to save for their retirement.
The problems have been compounded by the lacklustre stockmarket, which has hit savers as City firms have rushed to protect their profit margins by increasing fees.
Research has shown that fees in this country are far higher than those in America, where investment funds have been the subject of several regulatory and other official investigations.
Several senior City figures have decided to blow the whistle on the practices, with one fund manager describing the system as a “legalised cartel”.
Alan Miller, a former senior fund manager at New Star, one of Britain’s biggest investment firms, and a co-founder of SCM Private, told The Daily Telegraph: “The time is right for exposure of various elements of the industry.
“It is riddled with blatant self-interest and conflicts of interest that would never be tolerated elsewhere. Investors have become victims as the charges they have to pay have risen and risen while the returns they get have been consistently below par and the actual cost of managing their money has continued to fall.”
Research compiled by the Financial Services Authority and leading data analysts suggests that investors face losing three per cent of their investment each year in charges and fees. However, Mr Miller and Mr Norman said annual charges as low as 0.5 per cent were achievable.
When a saver invests in an ISA, unit trust or other fund, they are informed that they will pay an “annual charge” – typically 1.2 per cent of the value of their savings. The majority of funds levy exactly the same charge.
But the firm also deducts a range of other vaguely defined fees – covering everything from research to office costs from the savers’ money.
In particular, funds charge savers fees and commission every time they buy or sell shares. In some funds, hidden fees can be more than three times higher than the publicly-released annual fees.
For example, according to the data company Lipper, the Halifax UK Growth fund, one of the country’s most popular investment schemes, has only returned 7.47 per cent to savers over the past five years.
Therefore, someone investing £10,000 would have received interest of £747. However, that the fund has actually risen by 15.79 per cent and the extra returns have been pocketed by the fund manager and City brokers.
Data from Morningstar, a research company, shows the average investment fund has an annual charge of 1.25 per cent. But lesser known administrative fees amount to 0.45 per cent. And trading costs total another 1.35 per cent, according to the FSA and Financial Express. This 1.8 per cent being deducted from the total £406 billion invested amounts to £7.3 billion being “skimmed off” each year.
Julie Patterson, director of authorised funds and tax at the Investment Management Association said: “The UK fund management industry is one of the most competitive in the world.
“Less than 50 per cent of the annual management charge (AMC) is retained by the manager, to cover fund costs, including investment management and administration. The majority of the AMC is used to pay advisers, brokers and platforms. Charges for UK authorised funds are fully disclosed and they vary.”
http://www.telegraph.co.uk/finance/personalfinance/savings/7919778/7billion-a-year-skimmed-off-our-savings.html
http://www.telegraph.co.uk/finance/personalfinance/savings/7919778/7billion-a-year-skimmed-off-our-savings.html
Savers lose out as advisers cash in
Savers lose out as advisers cash in
An “insidious relationship” between financial advisers, investment funds and stockbrokers is costing savers billions of pounds in lost income, it has been alleged.
An “insidious relationship” between financial advisers, investment funds and stockbrokers is costing savers billions of pounds in lost income, it has been alleged.
The close links between different parts of the industry, based on lucrative commission payments, are said to be preventing thousands of people from getting the best deal.
Investors may be unaware that advisers can receive thousands of pounds from their stake and recurring fees in return for referring them to a savings or pension fund.
Others do not know that stockbrokers receive valuable commissions for trading the stocks and shares their funds hold – and can “churn” the fund to make more.
Rosina Lizar, 86, from Manchester, was advised to put her savings of almost £10,000 into a Scottish Mutual Commercial Property Plan in December 2002.
The fund had an initial charge of 17.5 per cent, more than three times the current industry standard of five per cent. This saw £1,750 promptly docked from her stake.
Mrs Lizar was told that the fund, which was being recommended by other advisers at the time, had good prospects of making her large returns. Eight years on, her stake is worth little more than £1,000.
The financial advisers received four per cent commission, worth almost £400, for persuading her to join the fund. They were then entitled to a “trail commission” worth 0.5 per cent of Mrs Lizar’s stake – £50 initially – every year from then on.
Mrs Lizar’s daughter Geraldine Lawton, 60, said: “She had no knowledge of investment and trusted her adviser completely.”
Her new financial adviser, who did not wish to be named, said: “This was disastrous. Someone at that age should have been directed towards simple, low-risk investments protecting her capital. She doesn’t have much.”
Advisers insist they are not swayed by commission. A spokesman for the adviser’s firm said it had “robust systems in place” to ensure customers were given appropriate advice.
“The case has been investigated and at the conclusion of that investigation, a complaint was wholly rejected,” the spokesman said.
The FSA is planning to phase out new commission payments from 2012. But existing trail commissions – estimated to be worth more than £2 billion a year – will continue.
Experts fear advisers will find ways to circumvent new rules. Many advisers are already replacing trail commission with annual “financial health checks”, for which they charge extra fees.
Clive Waller, managing director of CWC Research, said: “There is always a danger for buyers using commission-based advisers. What if the best advice is not to do something? The only safe thing to do is to have upfront fees.”
Alan Miller of SCM, one of the City’s most successful fund managers, said: “There are insidious relationships across these different parts of the industry. Advisers will never recommend the cheapest funds because they don’t pay commission.”
There have also been calls for greater scrutiny of the relationships between fund managers and the stockbrokers they employ to trade the shares held by the fund.
Brokers make money by charging commission on the trades. Investors would hope that the broker chosen by their fund manager would be the one offering the best improvement on the price being quoted by a stock exchange.
However City insiders said this is not always the case. One trader said: “I know some people who only use one broker. Some just use their best mates, some are receiving nice presents. People are human." It is claimed that ski trips and junkets to the Cricket World Cup in the Caribbean and Monaco Grand Prix are regularly offered to clients by brokerage firms.
Other alleged relationships are developed more subtly. Donations on a website to charities nominated by Guillaume Rambourg, a former star fund manager at Gartmore now being investigated by the FSA. Brokers have denied this was an attempt to curry favour.
Mr Miller said: “Customers are saddled with the costs of ‘research’ from brokers, which is bundled into commission and can double trading costs. Why should people pay for what their manager should know already?”
Those in charge of deciding how to invest institutional and company pensions also mingle with executives keen to get control of their money.
Representatives from huge fund groups – including Goldman Sachs and Schroders – paid £1,670 each to meet managers of some of the biggest local authority pensions at last year’s local government pension fund symposium.
Officials controlling the £6.5 billion West Midlands Pension Fund, the £8 billion Greater Manchester Pension Fund and the £2 billion Nottingham County Council all attended this year’s event at the De Vere Dunston Hall in Norfolk. The hotel offered delegates a jacuzzi, steam room and 18-hole golf course on which productive deals could be struck.
A spokesman for Lipper, the respected US financial researchers, said investors in America were better protected in relation to the fees and commissions.
She asked “whether someone else ought to be acting on behalf of investors – a fiduciary responsibility. Such a role is undertaken by a mutual fund’s board of directors in the US, a majority of whom must be independent of the company managing the fund.”
http://www.telegraph.co.uk/finance/personalfinance/pensions/7923488/Savers-lose-out-as-advisers-cash-in.html
http://www.telegraph.co.uk/finance/personalfinance/pensions/7923488/Savers-lose-out-as-advisers-cash-in.html
Boustead
Boustead
4.8.2010
At the price of 3.86, its ttm-PE was 8.28 and its DY was 7.12.
Historical 5 Yr Data:
EPSGR 8%
DPSGR 17.8%
PE range 7.7 to 12.7
DY range 7.8% to 4.3%
Its ttm-PE is at the lower end of its historical PE range.
Its DY is at the higher end of its historical DY range.
Recent Stock Performance
Boustead has distributed regular dividends for many years.
Its dividends have increased over the years.
Given its present DY is at the higher end of its historical DY range, is Boustead undervalued?
At the present price, is this stock an investment providing a safety of principal with a potential of a moderate positive return?
4.8.2010
At the price of 3.86, its ttm-PE was 8.28 and its DY was 7.12.
Historical 5 Yr Data:
EPSGR 8%
DPSGR 17.8%
PE range 7.7 to 12.7
DY range 7.8% to 4.3%
Its ttm-PE is at the lower end of its historical PE range.
Its DY is at the higher end of its historical DY range.
Recent Stock Performance
| 1 Week | 0.0% | 13 Weeks | 2.4% | ||
 | | | | | |
| 4 Weeks | 9.2% | 52 Weeks | 7.7% |
Boustead has distributed regular dividends for many years.
Its dividends have increased over the years.
Given its present DY is at the higher end of its historical DY range, is Boustead undervalued?
At the present price, is this stock an investment providing a safety of principal with a potential of a moderate positive return?
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