Acted Mock exam 2

[code9063]

Hi,

I'm a bit confused by some wordings in the exam paper. In the attachment 2 it says "The investment performance quoted by ActInvest in their report is net of initial charges and investment management fees. To make it comparable to the figures supplied by CoreInvest we need to adjust it so that it is gross of initial charges."
And then the following formulae multiply 0.98 to the fund to take off the initial fee of 2%. I think this make it net of initial charges rather than gross of initial charges. What am I missing?

 

[David Wilmot]

Hi code9063,

We are trying to find the IRR or MWRR that CoreInvest's investment managers achieved on the investments they made (i.e. net of initial charges, but gross of initial charges). This is because the IRR or MWRR quoted by ActInvest is on that basis.

So we are trying to find the rate that solves [ (4*0.98)(1+i) + (1*0.98(1+i)^0.5) ] = 4.898 because that is the rate or return (net of investment management fees) which the investment managers achieved over the period. They invested the 4x0.98 and the 1x0.98, not the 4 and the 1.

All these returns are 'gross of initial charges' in the sense that they do not take account of the reduction in return experienced by the investor which is caused by the initial charge. The investor cannot take the amounts invested (e.g. the 4 and the 1) and roll them up using these returns and derive the value of their investment at the end of the period, because they are 'gross of' (i.e. do not take account of) the initial charge.

OK?

David

 

[code9063]

Hi code9063,

We are trying to find the IRR or MWRR that CoreInvest's investment managers achieved on the investments they made (i.e. net of initial charges, but gross of initial charges). This is because the IRR or MWRR quoted by ActInvest is on that basis.

So we are trying to find the rate that solves [ (4*0.98)(1+i) + (1*0.98(1+i)^0.5) ] = 4.898 because that is the rate or return (net of investment management fees) which the investment managers achieved over the period. They invested the 4x0.98 and the 1x0.98, not the 4 and the 1.

All these returns are 'gross of initial charges' in the sense that they do not take account of the reduction in return experienced by the investor which is caused by the initial charge. The investor cannot take the amounts invested (e.g. the 4 and the 1) and roll them up using these returns and derive the value of their investment at the end of the period, because they are 'gross of' (i.e. do not take account of) the initial charge.

OK?

David

Hi David,

Thank you for your reply.
I think I understand what you mean. but I don't think we can say the formula is "gross" of initial charge because we take away the initial fee by multiplying 0.98.

 

[David Wilmot]

Hi code9063,

I can understand what you mean when looking at the formula. However, we aren't trying to communicate how to calculate the return figure being quoted. What we are looking to communicate is the meaning of the return figure quoted, and how it can be used.

Describing it as being gross of initial charges, indicates that the actual return experienced on an investment would be less than that, due to the impact of the initial charge. The initial charge would have to be deduced before applying the quoted (gross) rate of return in order to derive the actual accumulated fund value net of all charges.

Regards

David