Beckford James LLP
By David Neale, Chartered Financial Planner, Beckford James LLP
In a release to franchisees on 13 May, the ‘McDonald’s’ restaurant chain talked about ‘accelerating recovery’ out of the crisis through initiatives across the global franchise. This prompted thoughts about parallels for clients and their financial planning. How can you accelerate out of this crisis and put your financial planning in a better position than before? The obvious parallel is looking at your underlying investments and their recent performance.
A regular question we get asked at the start of the planning process is whether an investment or pension held for years is worth ‘looking at.’ In answer to what has prompted the enquiry now, often it is due to an increasing awareness of the need for a financial plan especially if retirement approaches.
The recent months have been a challenging time for investment funds. Only a few specialist, esoteric funds made money as markets fell in February. Some of those had been positioned for a fall for so many years that the brief, impressive upturn did little to improve their long-term track record. Indeed, as markets have recovered from the March dip, some of these funds have fallen again.
Those funds aside, the wider question is, how did mainstream funds holding billions of pounds of investors’ assets perform, compared to their peers and their benchmarks?
People get nervous when talking about investment performance. It is unpredictable, un-forecastable in absolute terms, and relies on expectation based upon experience. Past performance is not a guide to future returns as we know, and to make decisions based on performance alone is foolhardy.
But we are reliant on investment performance to achieve our financial goals, whether that is having enough for retirement or buying a new home in the future, we NEED the contribution of investment return to assist with growth as well as to offset the erosion of inflation. There are quantifiable, comparable measures that should be looked at;
These qualitative measures should be reviewed regularly, to ensure you are not undermining your own future by not acting.
But this is not intended to be a naming and shaming exercise as publishing “worst fund” lists can be tacky and suggests some personal axe to grind. But there are some important statistics which highlight the contribution that some investments are making towards the shortfalls in investors’ financial planning. An example is where investors are paying higher, pre-RDR* fees for an actively managed fund but which is, to all intents and purposes, a tracker.
Looking at performance, if we consider one of the biggest financial sectors and talk about retirement funding, it is appropriate that to review a few of the major pension investment sub-sectors.
The largest fund in the pension ‘UK All Companies’ sector holds £11.6 billion of investors’ funds. Year to date it has lost -28% in value. Over three years it has fallen approximately -34%. In five years, it has lost approximately -25% of the wealth investors placed within. Over the same periods, the sector average has returned -17% year to date, -7% over three years and a positive return of 7% over five years. So, this enormous fund entrusted by thousands of investors has undermined their planning by 34% in relative terms to the peer group over 5 years.
In the pension ‘Mixed Investment 40-85% Shares’ sector where so many ‘default’ managed funds reside, the largest fund holds £21.67 billion of investors’ funds. Gross return year to date is -5% against a sector average return of -3%, over 3 years is bottom quartile at just under +5% with a sector return of +10% and over 5 years approximately +25% against an average of +31%. Again, relative under-performance of 6% over 5 years.
In the pension ‘Global Equity’ sector there is £17.6 billion in the largest fund which has under-performed against its peers woefully over five years at +35% where the average is +56% (relative under-performance of 20%). Alarmingly, the fund description explains ‘this fund is designed to outperform its benchmark.’
Why is there still over £50bn invested in these funds? Often, large trustworthy, household names give an air of comfort and it is easy to perceive that they will be doing the best job for you. In some cases, the funds will have been running for such a long time that large fund sizes have just accumulated. Without access to review tools, or the inclination to review funds, investors may never know. Perhaps this is where regulation should require funds to issue a relative under-performance statement, a little like product recall notifications that manufacturers are required to issue on faulty items. After-all, they are manufacturers of investment ‘goods.’
A point that many advisers reiterate; pension investors now have the extra role of investment management which they never used to have under final salary schemes. That responsibility is or was undertaken by the pension trustees who were responsible for delivering the final salary ‘promise.’
A particularly alarming statistic is that the three funds identified charge between 0.92% and 1% per annum as standard which is close to £500m in fees, across the £50bn assets under management, for under-performance.
Without the right tools for the job it can be difficult to properly assess this under-performance, which is why a conversation with a financial planner is likely to be enlightening. This should also highlight whether you hold a good fund in a sector that covers a broad range of investments and may well be sensible to continue to hold on to or a poor fund which should be switched out of or encashed.
When identifying that a client is invested in a fund that is a serial under-performer, the challenge an adviser often hears is, ‘you cannot guarantee you’ll improve going forwards,’ or ‘you will charge for your service.’
This is absolutely true, there are no guarantees but by using modern investment platforms you may be able to access lower cost versions of the same funds or move to active funds that are not “closet trackers” with higher charges. As for fees, you may already be paying someone for a service where they are under-performing and not directly accountable. Wouldn’t you rather pay someone who reports directly and reviews your investments more proactively?
So as we embark upon a new normal, if you are looking to accelerate out of this recovery by introducing fresh initiatives, There are a number of simple tweaks that could offer great benefit and we would be happy to help you identify them.
[All data sourced from Financial Express Analytics and accurate at the time of writing]
Beckford James LLP are Chartered Financial Planners based in Bath, Birmingham and London. We are happy to have an initial, exploratory conversation at no charge. Please get in touch on either 01225 437 600 or email firstname.lastname@example.org
* RDR – Retail Distribution Review, 31 December 2012
This article is for information only and does not constitute advice or a recommendation. Do not make any investment decisions based on this content. The views expressed in this article may no longer be current and may have already been acted upon, and while we have taken every care to ensure this information is accurate and current at the time of writing, we cannot guarantee or give any warranty as to its accuracy.
The value of investments can fall as well as rise and you may not get back the amount you originally invested. Past performance is not an indicator of future returns.