Paul's Insights: It pays to give high fund fees the flick
Chairman's Update – September 2018
A long time ago, in fact about four decades ago, I realised that neither I nor anyone else was an investment Albert Einstein. In fact I understand Mr Einstein was not a great investor either.
This revelation came about when I was in my 20s and, as many of us do in our early days of investing, I was playing with very small shares. During a boom, the results were heroic. But along came the inevitable bust and my investments were worthless.
That caused me to use high-quality active managers for small stocks and I was quite happy to buy blue-chips and property with my own research. At ipac, the company I founded with my four terrific partners back in 1983, I was not going to impose my primitive stock picking on clients, so we used Australian and international managers to perform this task. And it worked well.
By carefully researching managers to manage our clients’ money, we were able to generate them good returns in line with their risk profile. We used to get quite excited at our regular investment committee meetings with managers who outperformed the index. But, as we were using around 12 managers, some also underperformed. An obvious conclusion would be to dump the under-performers and keep the over-performers. But about the only thing I did learn was that last year’s best manager will not be this year’s best manager. Aggravatingly, it was typically last year’s worst-performing manager who was this year’s best.
Clearly, I am not too bright as it is bleedingly obvious that all managers can't outperform the market. So, a couple of decades ago I moved to the side of the asset allocators, namely that it is our spread between shares, property, bonds, fixed interest, cash and infrastructure assets across the Australian and global economy that is the key to returns.
So, apart from looking at a few individual investments as a hobby, I really only focus on my spread of investments across asset classes, which I do using a manager. We can make this as simple as we like. A balanced or growth manager will do the whole thing for us with our super or personal investments.
We may prefer to take more control of our asset allocation and use managers for more complex, research intensive investments such as global shares, bonds, infrastructure or small companies and do bigger local shares and property ourselves. This is a personal choice.
But one thing we must all do in this modern age is to minimise our fees. Sadly, as far too many of us pay too much for insurance, credit cards and our mortgage, we do the same with our investments.
An extra 1 per cent in fees can take around $100,000 from the super balance alone of an average younger worker. You can be an active, passive or somewhere in the middle investor. That is your choice, but don t choose to pay higher fees than you need to.
Check out our "Compare your fund" tool. It is a cracker. Pop in the name of your fund or manager and see if you are getting a fair deal.
At InvestSMART we are not going to dictate how you invest. That is your choice. We want to provide you with the tools, information, research and products to invest the way you want to. I know the lowest-fee way for me to invest is to do everything myself, but I am only one person with limited time, let alone the skills needed for global investing across many asset classes. I also prefer sailing and golf to spending day and night looking at my money. So, in my case, I predominantly use managers for my super and personal investments.
With either super or personal investments, I have a maximum fee in mind of 1 per cent. This will be much less for "basic" assets such as large-cap Aussie or global shares. There are some research intensive parts of my portfolio where I will pay a bit more. This is for things like micro cap or smaller companies, private equity and similar high-focus investments.
But the simple fact is, fees are falling right across the board. In particular, if you are in an old product, don’t expect the manager to let you know! That is a bit sad, but it is our money and we need to take control.
New world tools like "compare your fund" make it easy though. So, my advice is to get your asset allocation right for your goals and risk profile and decide how you want to invest. The implement your portfolio with a real focus on low fees.
Are you paying too high a fee for underwhelming performance from your fund? Compare your fund today.
Frequently Asked Questions about this Article…
Minimizing investment fees is crucial because high fees can significantly reduce your overall returns. For example, an extra 1% in fees can take around $100,000 from the super balance of an average younger worker. Keeping fees low helps maximize your investment growth over time.
You can use tools like the 'Compare your fund' tool offered by InvestSMART. By entering the name of your fund or manager, you can see if you're getting a fair deal and whether your fees are competitive.
Asset allocation is key to investment returns as it involves spreading your investments across different asset classes like shares, property, bonds, and cash. This diversification helps manage risk and can lead to better returns aligned with your risk profile.
This depends on your personal preference, time, and expertise. Managing investments yourself can be cost-effective, but using a manager can save time and provide access to professional expertise, especially for complex investments like global shares or small companies.
A reasonable fee for investment management is generally around 1% or less for basic assets like large-cap shares. However, for more research-intensive investments, such as micro-cap companies or private equity, you might expect to pay slightly higher fees.
To ensure your investment strategy aligns with your goals, focus on getting your asset allocation right based on your risk profile and investment objectives. Regularly review your portfolio and adjust as needed to stay on track.
If you're in an old investment product with high fees, it's important to take control and consider switching to a more cost-effective option. Use tools like 'compare your fund' to evaluate your current fees and explore alternatives that offer better value.
It's challenging for investment managers to consistently outperform the market. While some managers may have strong performance in certain years, last year's best manager is not guaranteed to be this year's best. Diversifying across asset classes and focusing on low fees can be more effective strategies.