Portfolio Turnover and Spread

All pooled investments buy and sell some portion of their holdings every year. This costs dealing fees and ‘spread’ (the difference between the buy and sell prices of individual shares).

The rate at which they do so is called the 'turnover' of their portfolio. ‘Turnover’ means:-

• If every share is sold and replaced on average every year the turnover is 100%.

• If every share is sold and replaced on average every two years the turnover is 50%.

• If every share is sold and replaced on average every six months the turnover is 200%.

A government-sponsored report several years ago calculated that it costs an institutional investor 1.7% to sell one share and buy another. It ought to be cheaper now - let us say 1%.

The average turnover across all UK funds is believed to be about 50%. So the average fund pays half of 1% (0.5%) in dealing fees. Funds may have turnovers as high as 300%.

When stockbrokers over-trade a private client's discretionary portfolio to generate brokerage income it is called "churning". This scam is rightly illegal.

Funds may give their business to brokers within the same corporate group at undisclosed rates and/or in return for soft commissions.

Performance Fees

Performance fees are based on an illusion. Avoid funds that pay them. Find out why in Deeper.

Withholding Tax

Withholding tax is deducted from dividends paid by overseas companies. These tax arrangements are enabled by agreements between the paying country and the receiving country. There are several thousand such agreements in the world and 130 that apply to the UK alone.

In some cases part or all of the tax is recoverable. Such recovery is sometimes automatic and sometimes requires personal application to the country of origin. Different rules apply depending on whether you are a direct shareholder, invest via a broker, or hold the share in a SIPP. If you hold the share via an intermediary you might like to consider whether it is reclaiming ‘your’ tax relief.

Official advice sites are completely silent on this whole mess. A broker does not even have to declare the nationality of shares it is offering. We suggest your choice of broker should be influenced by the quality of support it provides in this area. More on this here