Investors frequently focus on the investment returns that their portfolios deliver, but sometimes fail to consider that deductions in the form of the costs and charges imposed by fund managers can have a significant effect on their performance, particularly when taking into account the effects of compounding over the long term.
Imagine three different portfolios that deliver returns of 1%, 3% and 5% per year after inflation, but before other costs, over a period of 30 years. £100,000 invested in each would result in a growth of purchasing power to around £135,000, £240,000 and £430,000 respectively. Seemingly small differences in the compound rates of return, turn into large differences, in terms of financial outcomes. That’s one of the great positives of a disciplined and patient approach to investing – small returns turn into big numbers, given time.
On the other side of the coin, costs – when compounded over time – eat away at these market returns to a far greater degree than many investors ever imagine. Let’s compare two fund managers who deliver 3% before fees above inflation, where Manager A has costs of 0.25% and Manager B has costs of 1.00%. I have plotted the purchasing power impact of these differing fees on outcomes, over time, in the chart below. As you can see, costs matter a great deal; an investor in Manager B’s fund would be over £40,000 worse off than an investor with Manager A’s fund over a 30-year period. Put another way, a client would end up one third more wealthy by investing with Manager A over Manager B.
It is therefore our view that reducing these costs wherever possible is vital, as a pound in costs saved is no different to a pound accumulated from investment returns in monetary terms, yet it is far more valuable due to its consistency over time and the fact that it is achieved without taking any risk.
Taking this into account, we are constantly reviewing the funds within our clients’ portfolios to check these costs are as low as possible, whilst ensuring that the holdings remain compatible with our globally diversified investment philosophy.