Costs Calculations
Introduction
Cost calculations are essential for transparency and comparability in PRIIPs KIDs. This blog will detail the methodologies used to calculate various cost components, including entry, exit, ongoing, and transaction costs.
Cost calculations for PRIIPs involve several steps:
Absolute Costs
Calculated for entry, ongoing, performance, and transaction costs. The absolute costs calculation follows these steps:
- Entry Costs: Calculated by multiplying the entry cost percentage with the initial investment amount. For example, if the entry cost is 5% and the initial investment amount is €10,000, the entry cost would be €500.
- Ongoing Costs: Includes management costs, performance costs, and transaction costs, calculated by multiplying the respective percentages with the year-end value after deducting entry and performance costs. For example, if the management cost is 1.33%, the performance cost is 0%, and the transaction cost is 0.03%, the ongoing costs would be calculated based on the year-end value.
- Exit Costs: Calculated by multiplying the exit cost percentage with the year-end value after deducting ongoing costs. For example, if the exit cost is 0%, the exit cost would be €0.
Total Costs
Summed over different periods (1 year, half RHP, RHP). The total costs calculation is based on the absolute costs calculation and includes all explicit and implicit costs over the specified periods. For example, the total costs at 1 year would be the sum of the entry, ongoing, and exit costs for the first year.
Reduction in Yield (RIY)
Expressed as a percentage, showing the impact of costs on returns. The RIY calculation is based on the absolute costs calculation and is presented for different periods (1 year, half RHP, RHP). For example, the RIY at 1 year would be calculated by summing the implicit absolute costs (management, transaction, and performance costs) and expressing them as a percentage of the initial investment amount.
Transaction Costs – Slippage Methodology
To calculate transaction costs, FE fundinfo requires additional inputs from clients, including trade data (date, time, execution price) and arrival price. The slippage cost method is used for funds with historical trade data, while the half-spread method is used for newly launched funds or funds without available arrival price. The slippage cost method calculates the actual transaction cost by comparing the execution price with the arrival price, while the half-spread method estimates the transaction cost based on the bid-ask spread.
Transaction Cost calculation necessitates static data (e.g. fund name, legal structure, fees), dynamic data (e.g. NAV, AUM, dividends), and trade data (e.g. trade date, execution price).
