| Welcome to the October issue of the Select Wealth Management Dashboard Newsletter. Sports fans like myself have been spoilt for choice over the past month with plenty of action to choose from. Obviously the Rugby World Cup has been great, and will get even better now that we have reached the business end of the competition. But there has also been great netball results with the Silver Ferns tipping up Australia in the Constellation Cup, Bathurst motor racing with Kiwi Scott McGlaughlin winning in Australia, and my beloved Phoenix starting a new A-League season (in less salubrious style than their Kiwi netball, rugby and motor racing compatriots). Lots more to look forward to over the next month too with the prospect of the ABs making history and raising another trophy.
This month, I thought I would spend some time discussing a subject that always attracts plenty of interest - both by the general public but particularly in the media. Investment fees. Investment fees are a very emotive topic, and it is clear why this is (and should be) the case. Nobody wants to pay more than their fair share of fees. And it goes without saying that lower costs can have a material impact on the total return on your investment over time. So it is important to consider fees, and the recent public debate and scrutiny has driven down the costs of investment fees significantly in the past decade or so. Before we start, let's put some perspective around the conversation. Yes - fees are a very important consideration and it should be a material part of your decision making process when you consider an investment. But it is not the be all and end all - there are many other considerations too. There is no benefit in paying the lowest fee, but then achieving a terrible return or receiving terrible service. In every other purchase decision you make, price is only one of many considerations. When you go out for a meal, you don't always choose the cheapest restaurant. You want a restaurant where you will be comfortable, trust that the kitchen is hygienic, and get a good meal - even if this means you have to pay a bit more. The same goes for buying a car - maybe you want a car the is fuel efficient, has good safety features, is comfortable, etc, and it's likely you'll pay a bit extra for this. You could apply this thinking to any purchase decision. So it stands to reason that the same rational should apply to the cost of an investment. The key is to get "value for money". I recently jumped onto the Sorted KiwiSaver Fund Finder website. It's a great resource - check it out here. I was interested to see if there is any clear correlation between low fees and better returns. I found the results to be quite interesting. The site compares all the KiwiSaver funds against each other, and then ranks them in order of fees, returns and service. If you look at all the "Balanced Funds" that they compare (of which there are 55), you'll find that the average fee is 1.19% per annum. The average return (per annum over the past 5 years), is 6.47% after fees, and the average service score is 81%. So the questions is, do lower fees result in better returns? Worst service? Neither? I found the results interesting. If you rank these Balanced Funds in order of best return to worst return, you will find that 4 of the top 5 performers had materially higher fees than the average. So over the past 5 years, fund managers charging higher than average fees have achieved higher than average returns. Interestingly, 4 of the bottom 5 fund returns all had average fees (the 5th with high fees). So clearly lower fees do not always result in higher returns. If you compare the Conservative Funds, this is even more pronounced. The average fee for the Conservative Funds is 1.00% per annum, and the average return is 4.73% per annum over the past 5 years. So Conservative Funds on average have lower fees than Balanced Funds, but have also had materially lower returns over the past 5 years than Balanced Funds. Once again, lower fees do not necessarily result in higher returns. Furthermore, if you rank the Conservative Funds in order of best return to worst return, you will once again find that 4 of the top 5 performers had materially higher fees than the average. Of the bottom 5 performers, 2 had lower fees than the average, and 3 had higher. Once again, this suggests no correlation between low fees and higher returns. The following table illustrates the average fees, returns and service scores of Conservative, Balanced and Growth Funds compared to the top 5 and bottom 5 when ranked in order of best return to worst return: 
So as it happens, the funds with the highest fees (the top 5 Growth Funds), have actually delivered the best after fee return - better than any of their more cost effective counterparts. Furthermore, in all cases (Conservative, Balanced and Growth Funds), the top 5 funds in terms of returns have had fees which are higher than the average for their respective peers. In the Conservative Fund category, the worst 5 performing funds have had lower than average fees. So it seems in many cases, you get what you pay for. Now I'm not suggesting that you should rush out and find the most expensive investment you can - that would be foolish. But I am trying to make the point that there is no obvious direct correlation between low fees and good returns. Like I said, you need to be comfortable that you are getting good value for money. That means robust returns (compared to peers), good service, proper governance, a sustainable investment provider, and sound advice - all at a fair price. In terms of the markets, the past month has been a bit of a rollercoaster ride. Markets have been reacting to the "on again off again" Brexit and US / China trade deal news-flow, along with all the other usual day to day noise. All said and done, the end result is modest moves with the only major change being in the exchange rate between the NZ$ and GBP. Here are the numbers: |
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In terms of your Select Wealth Management portfolio, you will by now have received your performance reports for the September quarter. I am pleased to report that performance was good, with all asset classes performing well and contributing positively - particularly property. In keeping with the theme of fees, you will also have received the good news that Select Wealth Management have recently reduced their fees - a positive bonus for you. I am also super excited to announce that at Isaacs Financial Planning we have been negotiating to get even more competitive fees for our clients, and I hope to have an announcement on this for you soon. Watch this space! Finally, a quick update on our Giving Back program for Hutt Valley Gymnastics. We are now half way through the campaign, and are on track to achieving our goal of donating $2,500 to the Hutt Valley Gymnastics. Check out our progress at www.mifinancialplanning.co.nz/giving-back.html. Once again, thank you so much for the referrals of your friends and family so that we can continue to fund this program - we really appreciate it. Warm regards Dave and the team at Isaacs Financial Planning dave@mifinancialplanning.co.nz |
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This newsletter is intended for general distribution and does not constitute personal financial advice. Copy of my primary disclosure statement and secondary disclosure statement.