Ashley Percival, CFP®
Over the last few years with lower market returns the ongoing debate around passive versus active investment management received a lot of attention. Passive funds such as index tracking funds are generally cheaper than actively managed funds. A passive investment strategy attempts to mirror the performance of a particular asset class index, e.g. the JSE All Share Index (‘ALSI’). In contrast, fund managers employing an active investment strategy construct a portfolio of securities that they believe will outperform the broad based index that captures the aggregate performance of those securities.
At GlenFin™ we believe that there is a place for both passive and active strategies. We use either one investment strategy or a combination of both, depending on the unique circumstances and objectives of our client. That being said, there can be no doubt as to the negative impact of fees on investments over the long term. For this reason, we stay away from investment platforms with opaque costing structures or that penalises clients should they decide to disinvest or transfer their investments to a different product supplier.
The following graph is an illustration of the impact of fees on investments over a 20-year period:
Chart provided courtesy of Sipp Investments (Pty) Ltd.
The chart uses an example of a lump sum of R100,000 invested for a term 20 years, growing at 10% per annum. What this chart clearly illustrates is that fees which appear negligible become substantial over time.
The lines on the chart show the expected growth of the investment over a term of 20 years after fees ranging from 1%-2.5% are brought into the equation.
—— The value of the investment paying 0% fees would be R675,000 after 20 years.
—— Paying fees of 1% p.a. reduces the investment value to R560,000 – a 17% reduction in value.
—— Paying fees of 1.5% p.a. reduces the investment value to R511 000 – a 24.3% reduction in value.
—— Paying fees of 2% p.a. reduces the investment value to R466 000 – a 31% reduction in value.
—— Paying fees of 2.5% p.a. reduces the investment value R425,000 – a 37% reduction in value.
Whilst one cannot expect to invest for free, it is an eye opener to see that there is a whopping R135 000 difference in investment value after 20 years when paying annual fees of 2.5% versus fees of 1%. Over a longer term the difference will be far greater.
As an investor, you are entitled to know what costs you will be paying on an investment. Your financial advisor is obliged to fully disclose all charges to you.