When does it pay to 'be your own fund manager'?

Wednesday, Jan 30 2013 by

A lot of what we do at Stockopedia is based on the premise that it's not so hard for a typical investor to 'be their own fund manager' - that using the best quality fundamental data to implement a systematic approach to the stock market can reap substantial rewards over the long term. Yes you can beat the City.

But what I often hear from skeptics is that the costs of trading and rebalancing portfolios in this way are too much for an investor to bear. As ever in these things, it's best to argue with the facts so we thought we'd put together a little spreadsheet that illustrates at exactly which point it's financially worth running your own money versus sticking it in a fund.

 What are the costs involved in running your own money?

Apart from time, there are several costs to running your own equity portfolio. These include the transaction costs of:

  • Stamp duty/levy (typically a tax of 0.5% on purchases)
  • Broker commission (a typical £10 per trade from many UK brokers)
  • Bid/offer spread (what you pay to the market makers - 0.55% on average but can be just .05% for big caps but up to and beyond 1.5% for micro caps)

But there's also any self-advisory newsletter or service you might be using (in our case we will model the cost of a Stockopedia subscription at £179.99 per year).

What we've done in the spreadsheet attached is to take the above costs and model them against different equity portfolios based on the portfolio size and the number of stocks held.

Clearly as portfolio size increases the proportional costs of managing your money drop (as the fixed commission costs are proportionally lower), but as the number of stocks you own increases so do the costs of rebalancing the portfolio.

We have assumed that the portfolio turnover is 80% - that 80% of positions are bought and sold each year. This is actually the typical turnover of an average actively managed fund, so ideal for comparison, though quite possibley on the high side for an individual investor.

What are the costs of investing in a fund?

Our assumption is that we want to keep the annual cost of running our own money below 2.5% to 'beat' the cost of owning a fund. Fund expense ratios are often listed very appetisingly at e.g. 0.75%, but these fail to take…

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15 Comments on this Article show/hide all

Asagi 30th Jan '13 1 of 15

we believe that much of the work done by the layers of intermediaries & advisers in the investment industry is smoke and mirrors

This is (appropriately!) a more apt metaphor to use than you may have expected.

A large number of additional costs are bundled into the commissions that fund managers are charged by these intermediaries. These are not paid for out of the fund management firms own accounts. They are paid for by unit holders. The result is lower returns.

I have held a unit trust in an ISA for 12 years. I have never been charged an annual fee by the fund manager.

The annual income produced by the fund ain't much. I wonder why that might be.

They are taking customer's money without even saying they are doing so.

Of course when regulators have been asked to look into this (most famously, Lord Myners), I understand that they have pulled their punches in the interests of protecting the competitive position of the City of London versus Frankfurt etc.

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UK Value Investor 4th Feb '13 2 of 15

Thanks for that Ed, anybody who asks about costs at different portfolio sizes, I'll point them to this article. I've always said that an investor should probably have 20 or 30 K in their portfolio before going down the stock picking route. Until you're at that level you might as well stick with funds IMO.

Blog: UK Value Investor
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seasons 9th Apr '13 3 of 15

Thanks for this Ed. Is there a way to download the spreadsheet? I think I read it somewhere it is read-only on GDrive so everyone sees the same version. I'd like to play with the values, as I am in the happy position of getting a trade for a fiver.

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Cisk 10th Apr '13 5 of 15

Great article Ed. One other way I have found to build up positions cost effectively is to go down the regular investment route. TD Direct or iii (and others) allow regular monthly investment from £25 upwards into a basket of stocks - with iii in particular being very flexible in terms of the stocks they allow. Commissions are usually cheap - drawback is that they time the investment but you could always do larger sums in the months when you feel the prices are more favourable.

I find this to work well for smaller cap growth stocks - whose prices are often more volatile so pound cost averaging works well.

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marben100 10th Apr '13 6 of 15

Must have missed this excellent article first time round.

I'd just like to add one further point. Most investors start off with portfolios at the smaller end of the range considered. However, it should be borne in mind that even though running a portfolio that size yourself may not appear economic, doing so is highly educational and puts you in good stead for running your own larger portolfio at a later stage, when the economic benefits of doing so are more obvious.

When I started off, many moons ago in my 20s, my portfolio was around £5K. The experience I gained then (and over the years) has proved invaluable for running my current portfolio, which is well into 6 figures.



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Edward Croft 10th Apr '13 7 of 15

In reply to marben100, post #6

Great point Marben - running a portfolio of only £5k in size may be expensive when considered in terms of transaction fees etc ( 6%+ ) but you are getting thousands of pounds worth of educational value for only a few hundred quid.

A very good point and just goes to show that intangibles aren't always on the balance sheet !

Blog: Follow @edcroft on Twitter
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kp1961 24th Dec '13 8 of 15

I agree with the overall thrust of the article but I feel that there can be a role for low-cost tracker funds covering a market not catered for by ETFs. I want coverage of FTSE 250 and I cant' find an ETF for that - love to hear any suggestions. Also (I may be entirely mistaken as my knowledge is limited) I want to avoid income and accumulate any growth as a capital gain and funds seem to be a route to that not available via ETFs (I'm guessing I may have missed something here).

I've bought Vanguard Global Small-Cap Index (annual costs 0.4% hidden costs ?%) and HSBC FTSE 250 costs 0.25% (hidden costs ?%) . I'm guessing the churn costs shouldn't be too high in funds like these?!

I was hoping to monitor these in Stockopedia but I understand that this isn't possible.

Are all funds bad for the larger investor?

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mpat89 26th Dec '13 9 of 15

MIDD is an FT250 etf isn't it?

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TheWatchmaker 7th Jun '14 10 of 15

Thanks Ed. Really useful article.
The spreadsheet download works fine. Time for me to start playing with my figures.
It's useful to re-visit your own approach now and then to see if your are being reasonably efficient and not squandering some of you hard earned returns. We need to remember to be financially astute and not solely focus on the stock-picking element.

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TheWatchmaker 7th Jun '14 11 of 15

Tweaking the speadsheet

There are several straightforward adjustments you can make to tailor the spreadsheet to your own circumstances (without the need for advanced spreadsheets knowledge).

1) DON'T CHANGE anthing in the range B15 to K22 as these cells contain the calculation formula
2) Stamp duty - If you trade AIM shares then there is no longer any stamp duty on these. So you can input a value in cell B4 that is weighted to your portfolio. e.g. 100% AIM shares will have 0% stamp duty, a 50:50 blend of AIM and Main market would require a value of 0.25, or keep 0.5 if all main market shares.
3) You can do a bit of digging and calculate a weighted value for the Bid-Offer Spread(BOS) for you portfolio - I trade a high proportion of AIM shares and have 2.89% entered in B6 whilst the main market shares I trade would have a low BOS of 0.2% or lower. Otherwise do a rough estimate between say 5% for AIM and 0.5% for Main Market to get a sensible figure for your portfolio balance between Main Market and AIM.
4) The ranges of 'number of stocks' and 'portfolio size' that Ed has used in the spreadsheet are wide to ensure the default spreadsheet is meaningful to a variety of investors. You can tailor the ranges to suit your investment circumstances. In cells A15 to A22 I have put 3,4, 5 . . .etc to bracket my low number of stocks in portfolio. As I don't have 100's of k in my portfolio I have entered 5000, 10000, 15000 . . . etc into cells B14 to K14 to bracket my current portfolio values

What have I learned from this spreadsheet

This has been a useful exercise for me. I end up with a figure of 4.15% which is just into Ed's red zone. So, what could I change to bring the value down?
A) Commision costs - this is already low at £5 per trade (IWeb) so I think this is already optimised compared to the alternatives I can see that allow me access to AIM and Main Market shares. The BOS seems comparable with same stocks via other brokers too so no real impact from this.
B) If I trade less AIM shares then my BOS value will come down. However, I feel that AIM shares are where most of my returns are generated so that's not sensible for me. I did realise that one stock I own has a BOS >7.5% - maybe I need to consider this more before purchasing in future as I need to make a significant gain to wipe out my dealing+BOS costs for this stock.
C) I could save some money by not subscribing to Stockopedia - but I find the information too valuable and would expect a significant drop in returns without this resource. Also, I wouldn't be doing this exercise without having read Ed's article and borrowing his spreadsheet.
D) I could trade less often. I have 100% set in B7 (and my real value was higher last year due to shuffling money between accounts into an ISA). If I drop to 95% then I'd come out of the red zone and a drop to 50% would move me into the green zone.


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Whitbourne 8th Jun '14 12 of 15

Hello Watchmaker

"I have 100% set in B7 (and my real value was higher last year)" Wow!

It's a real handicap in my view to have such a high volume of transactions. For my main (retirement) portfolio, I try and trade as little as possible. Once you have decent diversification between sectors the portfolio looks after itself, with the occasional dividend reinvestment (I'm not retired yet) either in a new share or topping-up an existing holding.

It all depends on your style of course and few AIM stocks are suitable for that kind of long-term buy-and-forget investing. But you are right to highlight to influence of the spread. That's one reason why I seldom trade AIM shares unless I feel there is a compelling case and a reasonable yield in the meantime. You have to do well simply to claw back the spread + commission, and if you do badly then those factors simply add to your losses.

So I very much agree with "KEY LEARNING : TRADE LESS OFTEN" and this is something I am having to learn and be disciplined about. Trading is active, so you feel you are doing something positive. But actually, doing nothing is often the better strategy - unless some genuinely new information comes along, of course.

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TheWatchmaker 8th Jun '14 13 of 15

Hi Whitbourne - thanks for the feedback.
I'm still only 14 months into investing in shares - and I know I'm trading more than I should - but I guess it's part of the learning process. Making mistakes can be a great way to learn providing the costs aren't too high.
Part of the reason for higher trade frequency was that I started investing outside of an ISA and then started to sell up mid-year to move funds into ISA - still in process of getting all funds into ISA.
I recently set myself a target to reduce trading frequency so hopefully that will help me move in the right direction.

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catalogue 27th Jan '15 14 of 15

Stockopedia provides, among many others, a means of managing a portfolio. I found out about the site by way of Hargreaves Lansdown who manage my drawdown account. In that account are funds (that have performed as well as many of my stocks) and add a level of comfort as you would expect from names like Aberdeen. HL manage to handle unit trust performance within a portfolio so perhaps Stockopedia should talk to HL. Another of my brokers Charles Stanley lists estimated dividend earnings, which HL do not, and nor does it seem, do Stockopedia. It is all coming together but rather slowly!

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dmjram 28th Jan '15 15 of 15


One potential cost of individual shares vs holding a fund is capital gains tax.

When an individual rebalances they trigger potential capital gains for stocks held outside a SIPP or ISA. Whereas the fund incurs no CGT on rebalancing, only the individual does on disposal of the fund. Holding stocks directly therefore increases the risk of incurring tax on holdings simply in managing the portfolio which does not arise for funds.

Hence think you need to add the tax caveat that all investments whether funds or direct stocks are held in a tax free wrapper. If not costs are likely to be higher for large sized, directly held portfolios which are rebalanced at the 80% rate.

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About Edward Croft

Edward Croft

CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »


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