The Cost of Active Fund Investing

There are many options for buying a group of securities in one product. The most popular ones are mutual funds, segregated funds and exchange traded funds. What they have in common is that these products are an easy way to buy a group of securities at once instead of buying each security individually. The fund can also proportion the securities so that you the individual investor does not have to. There are two main classifications for what type of fund you can purchase in terms of costs. It is important to know how these costs work so you can avoid paying too much for this convenience. These products differ in terms of how they are administered, access to the products and their costs.

Active Versus Passive Investing

Before getting into which of the products are suitable for you, there are some aspects that need to be considered so that you understand what the variations are among the products.

Active investing is when someone (a portfolio manager) picks the stocks that are in the fund and decides how much of each one to hold (the weighting). This portfolio manager would also monitor the portfolio and decide when a security should be sold off, added to or have its weighting decreased. Since there is ongoing research, meetings and analysis that must be done to build and monitor this portfolio, this fund manager would have research analysts and administrative personnel to help run the fund.

Passive investing has the same setup as active investing, but rather than someone deciding what securities to buy or how much of each one to buy, the portfolio manager would copy a benchmark. A benchmark is a collection of securities which the fund is compared against to see how well it is doing. Since everything in investing is about how much money you can make and how much risk it takes to make that money, every fund out there is trying to compare to all of the other funds of the same type to see who can make the most money. The basis for the comparisons is the benchmark, which can also become comparing between peers or funds managed the same way. Comparisons are general in done only for returns. The risk aspect of the equation is handled by looking at what type of securities the fund holds or how specialized the fund is.

How Do I Know By the Fund Name If it is Active or Passive?

The short answer is that you have to get to know how the fund manager operates the fund. Some clues to know more quickly if the fund is active or passive are given next. If they are intentionally trying to pick securities according to some beliefs that they have about the market, this is active management. If the fund description talks about “beating the benchmark” or “manager skill” then it is actively managed. Looking at the return history, if the returns vary versus the index by different amounts each year, then the fund is actively managed. Lastly, the fees may be expensive and have sales loads.

If the name of the fund says “Index” or “Index fund” there is a good chance that the fund is passively managed. If the name of the fund says “ETF” or “Exchange Traded Fund” this could be a passive fund, but you need to make sure of this because some ETFs are actually active funds, but they are managed in a certain way. Most of the passively managed ETFs are provided by BMO, iShares, Claymore, Vanguard and Horizons in Canada and Powershares, Vanguard and SPDR (or Standard and Poors) and others if the holdings are from the U.S. Most of the other companies would have actively managed funds only. If the fund description states that the fund is trying to “imitate” the performance of an index or benchmark, then this implies that it is copying the index and this is passively managed. From the return perspective, passively managed funds will be very close to the index that they claim to imitate, but slightly less due to fees each year. The amount that the returns are under the index will be close to identical each year unless there are currency conversions or variances in cost which may come from currency fluctuations or hedging that the fund may do. Passive funds typically do not have sales loads as they are geared toward people who invest for themselves.

There are some funds that try to mix active and passive management. These products can be assumed to be actively managed, although their results will be closer to the benchmark than most of the other funds, so this is something to consider if the variation from the index is a factor.

Types of Costs

Whatever product you buy, there will be a cost associated with buying it, keeping it and selling it. This will be true whether you have an advisor versus doing it yourself, and whichever institution you go to. Even buying your own individual stocks will have trading fees which you must account for. How much you are paying for each product as well as the advice will make a large difference in what return you will receive at the end of the day.

There are many types of costs to be aware of when you are deciding which products to invest in. This article will focus on the active funds that make up most of the selection for retail investors.

The Management Expense Ratio (MER)

This is the largest cost for most funds and represents the cost of managing the fund. “Managing the fund” means running the investment company, researching the investments, advertising, overhead and the cost for the advisor or sales person when it applies. Administrative costs like GST within the fund and accounting for trades and record keeping are also part of the expense. The MER covers all of these costs in an actively managed fund. The MER is given as a percentage, which is the percentage of the assets that the fund manages or invests over a year of time. If you have $100,000 invest in a fund, and the MER is 2% per year, you are paying $2000 per year to keep this fund. The cost is subtracted from the return and what you see in your investment statement is your return net of fees, or after fees. There are exceptions to this rule if you have a high net worth account or a special arrangement with the fund company, but for the typical investor, this would be true. The Management Expense Ratio is the management fee plus the administrative costs. The administrative costs are usually between 0.05% and 0.1% of the assets of the fund. If the information you obtain states a “Management Fee” instead of a “Management Expense Ratio” you would have to add on the administrative costs to get the true fee. Seek out the prospectus and look up fund operating costs to find exactly how much the number is. In some cases, an advisory fee is also added to the management fee and administrative fee which can be substantial. If your advisor does not disclose this, the prospectus is the next best place to find out what the costs are.

For American funds, the MER would be called the “Expense Ratio” or “ER” which is the same thing as the Canadian MER, but advisory fees are not included in the ER and would be included in Canada for the MER if the product is actively managed. If the product is passively managed in Canada or the U.S., the same names apply, but no advice would be part of the cost since these products are used by people who invest for themselves and would pay for advice separately if they retain it.

MER Will Depend on Class

There are products that have various classes of the same product, the same way there are different models of the same car or the same cell phone. For investment products, the classes indicate how you came across the product, or what restrictions you have on access to the product. For example, Class A is usually a retail class where anyone can buy the product with any amount of money. There is Class I, which can be obtained through an employer or another institution. An example might be buying this product through your company pension plan. There is a Class O which typically has no fees embedded in the return and is reserved for non-profit institutions of high net worth clients that buy direct from the company. There are also classes that are part of different portfolios that are set up by the issuer, like Class F which would be available depending on who your investment dealer is. There are also classes that vary depending on what type of advisor you have and what relationship they have with the fund company. The best thing to do here is ask what class you are being offered and get material form the issuer on how much it would cost. In some cases, you can get the same product in a different class and pay less for it. Some companies may have “Series” instead of classes or some variation thereof. The key thing to note is that different versions of the same fund would different fees, and the differences can be substantial.

Sales Loads

Whenever you see the word “load” on a fund it refers to a sales load. This fee is paid to a sales person for advising you and recommending the product to you for the company. There are “front end loads” which are paid as a percentage of the amount you initially invest. If a front end load is 4% and you invest $100,000, you will pay $4,000 up front just to buy this fund. These funds may have the code “FE” in the fund name on your statement. Note that sales loads are not related to MER fees – they are separate fees. There is also a “back end load” or “Rear end load” which is a percentage charged to you when you sell the fund. These are marked with the code “DSC” or “Deferred Sales Charge”. If a back end load is 5%, and you sell $120,000 worth of this fund, you would pay $6,000 in fees to exit the fund. These funds tend to have a DSC redemption schedule which means the sales load will decrease the longer you stay in the fund. Most companies stop charging the rear end sales load after 6 years of holding the product. Since each company varies, you should obtain the details of this schedule up front and understand how the numbers apply to your holdings. There are also “no load” funds which do not charge sales loads at any time. You may also come across “Low Load Funds” and “Level Load Funds”. Low load is similar to the fees discussed above, but they are discounted or lower than average. The level load idea means that the same percentage of sales load is charged over time.

Some companies charge an early redemption fee if you sell their fund within a short period of time. How short the period is will depend on the institution. In some cases, it is 30 days, but it can be 90 days, 6 months, 1 year or some other time period. This fee is designed to discourage quick redemptions or short term trading of the product.

The best thing to do to clarify which load you have is to ask up front and have it explained to you. If the information is not forthcoming, it may be time to find another place to invest your money or do the research on your own. Note that sales loads only apply to a fund that is sold through a sales person. You may be able to get the same fund without the sales person in some cases. Passive investing generally does not have sales loads – but the exception would be if an advisor recommends these funds and charges you some type of referral fee. This would be another question to ask if you are being advised to buy a passive fund and are not seeing any direct cost to buying the product.

Currency Hedging Costs

This type of fee will occur in funds that trade in non-Canadian currencies and hedge them so that the price you receive would be in Canadian dollars. The cost of transacting the hedge itself is the fee being described here, and it can range from 0.5% to 1% per year. If the fee is not disclosed, assuming 0.5% is the cheapest that it will likely be. If you are investing in emerging market currencies or non-developed market currencies, the hedges are much more expensive to put in place and go higher than 1% per year. This is a cost embedded in the return of the fund, but should be examined to flesh out exactly what you are paying to have this hedged. Both active and passive funds pay the same fee for this type of activity.

The alternative would be to keep the securities in their home currencies and whatever changes happen to the foreign exchange rates would be reflected in the price of the product. The fact that currency exchange rates can change is a risk of your investment, but it is not considered a fee like the other fees discussed in this article. This fee does not apply if the fund price is in your home currency. You may have a U.S. dollar account, buy a fund that trades in U.S. dollars and then redeem this fund for U.S. dollars. Until you convert the money on your own to Canadian dollars, there is no currency charge. You would only have a conversion charge to change the final dollar amount to Canadian dollars.

Referral Fees or Trailer Charges

These can sometimes be called Service Fees. This type of charge is paid to a third party who sells the product to you on their behalf. It can be thought of as a referral fee or trailer fee. This fee tends to be captured by the MER, but this should be investigated with the company you are dealing with as this may vary. This type of fee tends to arise with active management as passive management products usually do not have any referrals attached to them.

Performance Fee

This fee is based on whether a fund achieves a return over a required benchmark – a reward for good performance. This type of fee is common with hedge funds or exotic types of products, but it is sometimes embedded in funds sold to retail investors. Like with most of the fees, ask questions and do your research because this type of fee will be different for every institution and product. This fee is optional in that it usually will not apply if the return on the fund is negative or positive but not that high, but the question should still be asked to minimize surprises.

Fees of Holding One Fund Inside of Another one

If a fund that you are investing in has other funds within it as part of its holding list, then you will pay the MER fee for the fund you are buying as well as the fund that the fund holds. The best way to check if this is happening is to look at the holdings list. If a fund holds another fund, it will be a large holding so a fact sheet with a top 10 holdings summary should provide good information. The actual numbers for each of these items will differ depending on specifically what the fund is and how it is managed. Some of the other fees like Sales Loads and Referral Fees would not apply to a fund held inside of another fund. If the fee is necessary to operate the fund, like currency hedging, then this would be included. Whether a fund holds stocks or another fund can also impact withholding taxes if the fund is investing outside of Canada – particularly for U.S. products. This topic can get complex, so it will not be discussed here. Some funds will have other funds to get access to illiquid markets, or parts of the world that have hundreds of securities. Buying a fund in these cases would actually save on time and trading costs, so it can be justified depending on the market being invested in.

Intangible Costs

The key takeway is that you need to do a cradle to grave analysis of what you have and see the costs from beginning to end of your investment period to get an idea of what is really happening. Ideally, the costs should factor in time spent, effort spent on research, and costs of discipline and assurance which would be available when dealing with an advisor that may not be there when you are doing it yourself.

Where to Find These Costs?

The most comprehensive place that will contain the most detail regarding fund costs is the prospectus. This can be found be searching for the product name and the word “prospectus”. If you do not know the exact product name, you can search the internet by the company name only, find their web site and then search for the product name there. The fund companies will have these documents with the regulator as well as their own web sites and they will be typically in PDF format which can be read and downloaded from your computer. A simplified prospectus would also have the same data that you would be looking for regarding fees.

3 Productive Activities That Help You Make Money Blogging

With so many things to do, you can easily get overwhelmed. Although they make it seem so simple, the devil is always in the detail. Fortunately, you can focus on the most important things and still multiply your income. Figuring out which tasks are important can be difficult. Based on years of my experience, here they are.

1. Persuade
You need to persuade in everything that you do. You want to readers to peruse your blog content. For that, you write magnetic headlines or titles. Make the title irresistible so they can’t help but click and read the rest of the article.

When you need them to subscribe to your RSS feed, you sell them the benefits of doing so. The same thing applies to the buying decision. You want to persuade them so they feel good about buying.

If you decide to be an affiliate and sell other people’s product, you also need to persuade people to they click and take a look at what you recommend. This technique is called pre-selling. Basically, you want to learn how to make people take action.

This doesn’t have to be a bad thing as long as the action they take are going to move them at least one step close to their goal.

2. Network
Blogging is a communication and interaction tool. You can’t grow your blog if you don’t network with other blogs. Bloggers will link to other people if they already know him/her. At least it is more likely for them to do so. They also will pay more attention if you already cultivate the relationship with them.

Talking about relationship, you also need to do that with your audience. Don’t leave them cold. They don’t like that. Especially nowadays, they expect to be a part of the community by participating actively. That’s why they try to be active in blog comments. So talk to them.

3. Optimizing
You need to keep finding things that you can optimize to get better results. Perhaps you should ask the readers to subscribe to your RSS feed if they find your blog post interesting.

You should also test different spots to place ads. If you use AdSense, you should find ways to get the most clicks by testing shapes and colors too.

By constantly optimize your blog, you will increase your income from existing traffic. When you grow your blog, you will be able to make more money with less traffic compared to other blogs who fail to optimize.

Why Product Activation For Software is Becoming Widespread

Product activation is widely used by software vendors to protect their applications and enforce license agreements. While some users object to any form of license management, modern product activation systems are superior to other techniques from both the vendor’s and the end-user’s perspectives.

Software vendors use license management for a variety of reasons. They are often concerned about protection from piracy, and protection against users exceeding their agreed license terms (such as the number of installations that run in a customer company). License management also allows the software vendor to develop, distribute, and support one version of their application, but offer different license terms at different prices to different markets.

For example, the vendor can use the licensing mechanism to provide trial licenses, perpetual licenses, subscription licenses, set limits on the product features or modules enabled, set usage limits, combination’s of all of the above, and offer straightforward upgrades in capabilities, all with just one executable (some license management systems even allow the vendor to also offer floating licensing either over the end-customer’s network or the Internet based on this same executable). Finally, license management can enable the vendor to automate fulfillment, management and reporting, so reducing operations costs and offering immediate delivery worldwide 24×7 to their customers.

A key concern for software vendors is ensuring users don’t just give the software to unlicensed friends and colleagues, or even post it on the web for anyone to download. The standard solution is called node-locking, where each user’s installation is locked to one or more parameters of their system, such as the MAC address. Each time the application runs, it reads, say, the MAC address of the computer where it is running, and will proceed only if the address it reads matches the one recorded for that license.

Older approaches for license enforcement include dongle-based licensing and key-file-based licensing. A dongle is a hardware device that plugs into the user’s computer; when the application runs it checks for the presence of the dongle and will run only if it finds it. Dongles do therefore allow the user to move their license around, but only by physically relocating the dongle. With key-file-based licensing, the license limits and node-locking parameters are encrypted in a file, which is sent to the user and read by the application each time it runs.

These approaches have a number of disadvantages. Dongles require the distribution of the hardware, with all that entails in material cost, shipping cost, delivery times and management by the vendor. They are widely disliked by end-users, who don’t want to wait for them to arrive, keep track of them, have them stick out of their computer and so on.

Key-based licensing improves on dongles as the encrypted key files can be delivered immediately by email, and impose no hardware burden. However, they do require the user to provide the names of the locking parameters (or run a utility to read them), and do not allow users to readily move their license from machine to machine, as such a move would require a new key file. An upgrade to a user’s license, such as extending a subscription, also requires the generation and delivery of a new key file.

Product activation improves on these older approaches. Fulfillment is immediate as with key-file-based licensing, but the node-locking is accomplished automatically at activation time, so the user is not required to supply any information, and indeed is unaware of the specific parameters to which the license is locked. Modern activation systems also support the relocation of a license by the user, who can activate their license on one system, then perhaps months later deactivate their license on that first system and activate it on a second system. The activation system ensures only one copy of a given license is active at any one time, thus addressing the vendor’s concerns, but the user can move their license from, say, their office machine to their laptop, then to their home machine, as they wish. The activation system can also automatically transfer user settings, so the newly-activated installation comes up exactly as the user had configured the old one.

If the user upgrades their license, perhaps by converting a trial license to a production license, extending a subscription, or purchasing additional features or modules, the vendor simply updates the record for that user in the hosted activation system, and the user clicks a menu command to update their license, causing the new limits to immediately take effect.

Product activation systems therefore meet the software vendors’ need to protect against piracy, offer a range of license models, and automate operations, but remove many of the inconveniences and costs of older license management systems. Early product activation systems that didn’t support such capabilities as activation on disconnected systems or license relocation did give the approach a bad name, but modern product activation systems have this flexibility so are gaining acceptance with vendors and users.

Considering Product Activation? You Need to Think About These 10 Issues

Product activation is a popular approach for securing software licenses. However, software developers need to consider all the requirements for a capable activation system, from the license models they’ll need to support to how they’ll deal with the corner-case customer environments.

The basic activation process is typically as follows. Upon purchase the software vendor sends a unique product serial number to the user. When the user installs the application they are prompted to enter their product serial number. Their application connects to the vendor’s hosted license server over the Internet to confirm that this product serial number is valid and has not already been used to activate a license. It also obtains from the license server the license limits that apply to that user’s license, such as a time limit or enabling of product features. Finally it locks the license to the user’s system by reading certain machine parameters, such as the MAC address or hard disk ID, and encrypts the license limit and locking information in a file which is saved on the user’s system. Once activated the application interrogates that local encrypted file to perform its license check, so continues working on that user’s specific machine within the defined license limits with no further communication required with the vendor’s systems.

Sounds simple enough… but here are the ten areas you need to consider as you select a product activation system.

License models

What are the license models you wish to offer across your target markets? Are there other models Marketing might want to offer next year? Here are some possibilities:

* Time-limited licenses, for trials or subscription licensing
* Feature-enabling, to offer different price points or to package your product for different verticals e.g. a customer’s license might have Feature A to be OFF, Feature B at the Pro level, Feature C at level 5, Feature D on a 30-day trial and so on.
* Usage-based licensing. This could be metered (where the usage is tracked for subsequent reporting and billing, but not limited) or debiting (where the user purchases a usage quota which is depleted as the application is used).
* Custom licensing. Maybe you need to communicate some licensing parameters to your application, such as the Terabytes of data to address, number of communication channels to support, number of pages open at any one time and so forth.
* Some combination of the above e.g. enabling each feature with its own usage and time limit.

Disconnected systems

Not all computers have an Internet connection, so you need to consider how you will support your users who are on isolated corporate networks, or just can’t get a network connection from their laptop. The whole point of product activation is automation and convenience – you don’t want to have to set up phone support (during working hours, 24×7?, multi-lingual?) to help people without a network connection. Luckily, there are some solutions… if you pick the right system. For example:

* User self-service activation. Does the activation system provide a way for users to activate licenses on disconnected systems? A common approach is for the licensing software, when it finds it can’t connect to the hosted license, to encrypt the locking and product serial number information in a file, which the user then hand-carries to any web browser for upload to the vendor’s self-service web page. The vendor’s system accepts the file, checks it, and returns the encrypted file needed to enable the license. This file exchange can also be done by email, or even snail mail.
* Proxy server support. In many sectors such finance, mil/aero and government, users’ systems don’t have a direct connection to the Internet but can access it via an HTTP proxy server. Can your applications access your hosted license server via an existing HTTP proxy server?
* Install your own proxy server. If there isn’t a suitable HTTP proxy server available, does the activation solution include its own proxy server for installation on the customer’s network?

Security

The idea is to protect your applications from hacking and ‘honest abuse’ (over-subscription by legitimate customers), so you need robust security. Here are some questions to consider:

* If you issue time-limited licenses for trials or subscriptions, is there protection against users who try to extend their license by turning back their system clock?
* Is there protection against users who try to hack or spoof the licensing library built into your application?
* Is the communication between the licensed application and the license server secure against man-in-the-middle attacks, replay attacks, and counterfeit attacks?
* If you are tracking license limit data locally for each user, are these records secure against hacking and rollback to prior versions?
* Can no-one else set up a license server and issue licenses for your product?

Node-locking

The general approach to preventing a license from simply being copied onto another system is to lock each license to your desired parameters of the target system, such as the MAC address, host ID, hard disk ID and so on.

So far so good, but here are some node-locking questions to ask:

* Is the node-locking mechanism flexible and extensible, so you can lock to the parameters you wish?
* Does the node-locking mechanism follow generally-accepted computer science principles, and not do such tricks as bypassing the operating system, with all its unforeseeable consequences (such as breaking just because the user installed a boot manager, or upgraded their operating system)?
* Can you secure licenses on virtualized systems (e.g. VMWare), where the hardware parameters can legitimately change for a licensed user? How about supporting users who run Windows on a Mac?
* If you want, can the node-locking mechanism provide resiliency against small changes, so not inconveniencing users who make a minor system upgrade?
* Can you specify a set of locking parameters, with the license working if any one of them is matched? For example, perhaps your user wants to be able to run their license in one of any four machines – can you accommodate this?
* If some users really prefer dongle-based licensing, can you lock to a dongle as well?
* If you sell a system with your own custom hardware in it, can you lock the license to, say, the serial number in your custom hardware?
* How do you deal with the inevitable ‘My machine crashed – how do I restore my license?’ user inquiry?

License Relocation

The fact of life is that users often want to move their license to a different system, months or maybe years after it is first activated. This appears straightforward, but there are some issues to consider:

* Maybe you don’t want to offer this facility to everyone. Can you control which users are allowed to relocate their licenses?
* For users who are allowed to relocate their license, can you control how often they can do so? You may not want them doing so every day (that sounds like they’re sharing the license with others).
* Is there are any intervention required on your part during a license relocation, or does the product activation system take care of it? Is it secure?
* Can licenses be deactivated on disconnected systems?
* Your application may well have some settings your users adjust as they work with it, so your application runs exactly as they like it. Do they have to set these up again on the new installation (that would be annoying), or can you transfer them automatically?
* Does the product activation system track license relocations, so you know what your users are doing? Could it alert you when a relocation is done?

License Revocation

Maybe you don’t fully trust your customers, or perhaps you sell your product on credit, or on a monthly subscription, so might need to revoke a user’s license if they didn’t pay up or re-subscribe.

* Can your activation system revoke a user’s license?

Reseller sales

Perhaps you sell via resellers or OEMs now, or plan to do so. Maybe your sales department is looking for resellers overseas, or has it in their strategic plan? In that case, you’d better be ready to deal with the basic issue: how do you delegate order fulfillment (if desired) to your reseller, while still keeping track of the licenses they issue?

* Can your activation system allow resellers to issue licenses?
* If it does, can you restrict the range of licenses they can issue? For example, can you prevent them enabling certain features that aren’t part of their agreement with you, can you limit the number of licenses they issue, or set a maximum time limit on the licenses they issue?
* Can you generate a report on the licenses they’ve issued? Can they?
* Can you receive an alert when they issue a license?

Extensibility

While you may think that all your customers’ needs will be met with a product activation approach, what if that isn’t the case? Perhaps some users will not want any information to go out of their organization at all (often the case with some government and financial institutions).

* Can your activation system also support, say, dongle-based or floating licensing over your customers internal network, with no outside communication required at all?
* If you do need to support floating licensing or dongle-based licensing, does engineering have to re-do the licensing integration, or does the existing licensing system they integrated for product activation support it without needing any modification or replacement?

Platform support

Of course you need to protect your application on all the computer platforms you support.

* Does the activation system provide a client library for all your current platforms?
* How about platforms in your product roadmap?
* How about 64-bit platforms?
* What if a major customer requires support for a non-standard platform – can you readily obtain it?
* If your application is in Java, and you take advantage of Java’s platform independence, is the licensing library actually multi-platform, or are you introducing platform dependency?

Back-office integration and infrastructure

If your business involves a large number of licenses, or you expect it to, you may want to automate license fulfillment.

* Can you automate fulfillment from your back-office/CRM system, say via Web Services?
* Can you automate management tasks, such as backup, archival and reporting for the licensing system?
* Maybe you don’t want to host the license server at all. Is there a 3rd-party managed service available?

Clearly not all of these questions will apply to all software vendors, however they hopefully provide food for thought, and suggest areas you should consider to ensure your product activation deployment is successful.