High charges kill performance………

I have long argued that charges are not always the be all and end all when it comes to investing.

The problem is that we are fixated on charges and a belief that the higher the charges the more you will lose in your investments. To lower charges further there is an argument that funds which track an index will deliver better returns than an active fund because of the lower charges and the inability for many managers to beat the index.

For nearly five years we have been running portfolios, and recently I put together a closely matching portfolio tracking the index. The index takes into account a charge of around 0.4% and ours including the platform charge, fund charges and our fee comes in at around 1.7%. That is a whopping 1.3% p.a. difference.

Each year we review the funds and rebalance.

Our Cautious Portfolio has returned 84% since 1 January 2009; the equivalent index portfolio would have returned 43%.

On the more adventurous side the portfolio has delivered nearly 95% return and the index 57%.

This means on the cautious side we have delivered 95% out performance and 67% on the adventurous side with a 1.3% p.a. drag.

This blog is not about how good we are, the point of the blog is this. We are conditioned to think that high charges kill performance however good active managers will charge more as will financial planners however if they can deliver significant returns over the equivalent tracker portfolio then actually these high charges are insignificant.

Of course there are two additional points to consider, often when investors choose trackers they do not develop a portfolio of tracker funds and therefore heighten the risk and potentially lower the return and secondly investors can develop their own active portfolio. The cost of an equivalent active portfolio without advice would be around 1.35% p.a. The question then is, is it worth paying 0.35% p.a. to get someone to do the research and build the portfolios for you as well as giving you piece of mind with regards to your financial plans.

In conclusion what is painted is not always true you need to dig deeper, think deeper and sometimes go against the crowd to achieve what you want.

Cash is not the right savings vehicle for everyone…..

I have read some tweets and articles saying the end of Funding for Lending a year early could be good news for savers and this made me think…….why do we assume that cash is the only savings vehicle?

With cash we seem stuck in the past:

• The FCA and savers seem to think that cash is the safest means of investing
• We continue to think that when we retire cash is where we should hold our money
• For something a little more risky we might look at bonds

Cash can work for short term investments; so for example where cash only needs to be held for 12 months then it makes sense, maybe for a deposit on a house. Also if people have only a small amount of savings then perhaps cash is the only option.

But other than this, personally I think cash is not the right savings for most people who use it.

• Cash used to be a good place to invest. In 1999 the average ISA was paying 6% p.a. tax free. Taking an income of 5% would still deliver growth of 1% a year (below inflation but still comfortable). Now the average ISA return is below 1%..... this means it can no longer deliver income and growth. I recently saw a 10 year fixed rate at 4% p.a. – if you are holding for ten years then surely equities are also worthy of consideration?
• Life expectancy has changed and so have our retirement patterns. 65 was set as a retirement age where we were expected to live less than five years in retirement. It made sense to move all money into cash because the period you need it for was so short. Now life expectancy is nearing 20 years in retirement, would you really hold money in cash for 20 years? Consider at 45 investing in cash to 65, just considering this would be crazy
• Past performance - bonds have enjoyed a 30 year bull run; we look at cash and we think bonds have to be the place to be. No! The bull run is coming to an end, we don’t know when but many people accept that over the next five years bonds are likely to return flat or negative returns

So back to my point; perhaps savers need a lift but it won’t happen until interest rates rise, and when they do savers will be the last to benefit. In reality, rates might not start going up for at least 2 years possibly three which means savers in cash could see another decade of below inflation returns which means no real income and no returns.

We need to educate people that cash is not the only savings vehicle. In a changing environment we need to change our thinking…….

Where’s the value….

In recent days we have been given an indication of what Hargreaves will charge. They have clearly indicated that the cost of both the bundled and unbundled structure will be the same. Even before this announcement I have often questioned where is the value in a structure like Hargreaves or any other direct platform.

This question perhaps is not as stupid as it sounds. Say, Hargreaves are taking 0.6% p.a. as a fee for their proposition what do we get for that. I am a Hargreaves customer and have been for some time. For this fee I get a trading platform for my pension and really for me that is all I value. I don’t value their website because I can get that information from independent sites, and from my own research, nor do I value the mailings I receive. So for me the fee seems a little steep.

For my ISA I use iii.co.uk because they charge both me and my wife £80 a year which goes towards the cost of the trading charges. This is a no frills site and gives me everything Hargreaves give me but without all the mailings.

If we take our proposition as financial planners, we know that our investment portfolios including the investment funds, the platform charge and our fee come in around 1.70%. For an equivalent portfolio on Hargreaves this would cost me around 1.35%. So the extra cost of an advised proposition is 0.35% p.a. The pension is a little higher.

The argument has always been that you save money by going direct but I want to question where is the value? In reality if you go direct you are in control of your financial plans and your investment decisions, what you receive might guide you but ultimately that decision rests with you. Some individuals will feel that saving 0.35% p.a. is worth that.

However, I would actually argue that if I was going direct and confident to go direct then actually the saving should be a lot greater because in reality all they are, are a platform to enable you to facilitate your financial plan.

It made me think about what you get for the additional 0.35% p.a. from a financial planner. A good financial planner will deliver:

• A financial plan which will take you through all your life steps both pre and post retirement i.e. it is a lifetime plan
•  They will look to give you the most tax-efficient means of saving for retirement, and by doing this will enable you to save tax in retirement
• They will look after your investments giving you peace of mind whatever the market is doing

There are so many statistics from both sides of the fence but it is true that it is very hard to be detached from your investments if you are managing them, and for all the stories of success there are disappointed investors looking for someone to blame.

If Hargreaves stick to what they have said then the question we have to ask is whether a saving of 0.35% p.a. is really worth it, and whether the additional cost against the additional benefits is worth paying for. If we think it is then we should seek advice. If we don’t then I would then question whether we value what they give as a direct provider and whether there are cheaper offerings delivering the same service.

In summary with such a fixation on cost, you need to ask where is the value? Only when you can answer that can you decide which is the best route for you.

Would you buy a car not knowing what you are paying for….

When I started this blog and twitter feed I wanted to provide some education and also highlight areas of interest. One area that remains a concern is the apparent disparity between how advisers are priced and how direct platforms are priced. 

We have been eagerly awaiting Hargreaves pricing and this has been put back, again and again. This is interesting because how they communicate this is really important. 

At the moment if I buy a fund from Hargreaves I might pay 1.35% p.a. The way the marketing goes is that effectively investing via them is free and actually if the fund price was 1.5% p.a. then I am getting a discount of 0.15% p.a. 

The reality is that Hargreaves receives a rebate up to in some cases 1% on funds, part of this they share and part they keep. And why shouldn’t they, effectively you don’t build a business out of nothing (as can be seen by the dot.com bubble). 

The challenge they face post RDR is that charges have to be transparent and also they cannot bulk convert clients to a clean share class where they are worse off. Equally I am not sure of the rules on this but I assume if the clients are better off under the clean share class they should be offered the ability to switch.

So this then starts to create a problem. Hargreaves have announced they will not bulk switch clients to clean share classes because clients need to make that decision themselves. The press article gave an insight to their future pricing model because they state the position will be the same whether the client is in clean or bundled share class.

This now tells roughly where the pricing will come in – take the example. If the clean share class is 0.75%, then the Hargreaves fee will be around 0.6% p.a. 

The challenge for them is that now people are going to be able to see what they are actually paying and the question is like with financial planners whether they see value in that charge. If it comes in around 0.6% p.a. when there are operations like iii.co.uk who charge £20 per quarter, which is better for the client? Remember Hargreaves have been vocal on the impact of charges. If you take the Hargreaves average fund value of £40,000 this is equivalent to 0.2% p.a. on the iii model but obviously goes down as the fund value goes up. 

Effectively people have been buying a Hargreaves product without knowing what they are paying for, if the statement is correct then the charge is high compared to other models. This is a challenge, they are good at what they do but so are others who offer the same at less. Don’t write off Hargreaves but equally don’t ignore this statement because lots of people have.

Timing the market

This is my second blog looking at investment performance and how this is seen as a given by clients.

I can quote every statistic under the sun about market timing and how hard it is to do. I want to give two examples.

I have indicated in previous blogs that I have purchased Lloyd's shares. I have noticed a pattern to the share price. It hits say 60p and then drops down for around a month to say 55p and then fluctuates before going back into the sixty territory before moving upwards. It has done this all the way through its rise from around 20p.

If I was good I would sell at what I see as the high and then buy back in at the low. If I had done this I would have made a fortune......until of course the time came when the share pattern changed.

We build portfolios for clients and we re-balance once a year on 1 July. I can tell you what the portfolios do every month. I know the best months tend to be in the first and last quarters. The middle two quarters tend to be flat. I am sure I could analyse a specific point when it would be the best time to invest, but that is only right until the pattern changes.

My point in all of this is, there are some people who claim they can perfectly time the market and choose the right investments. In reality these people are few and far between.

In my last blog I indicated that the markets were reaching fair value. Most people wait for the markets to recover before investing, this is not a bad thing but they tend to be disappointed because they expect the same returns as were being delivered during the recovery phase and that just won't happen. I can't say for certainty that our portfolios won't deliver 10% plus next year but I am sure at some point they will return to a more normalised return.

Timing the market is a fools game, all statistics demonstrate that the longer clients remain out of the market the more money they will lose.

In summary investment performance is a given, this means understanding the market is an essential part of the package and good communication should enable clients to rest easy during market wobbles because ultimately they buy into the long term picture. Trying to work out when to jump in is a fools game, and unless we are geniuses one to avoid.