Understand investment costs – they really do matter

Higher investment costs almost always mean lower investment returns. So understanding the fees and charges associated with your investments is important.

A recent study carried out on behalf of Vanguard Asset Management has shown that the average returns for funds in the lowest-cost quartile across all sectors in both equities and fixed interest have always outperformed the highest-cost quartile.

This is the latest piece of evidence showing that costs really do have an impact on investment returns. In fact, the academic evidence from over 50 years of research has demonstrated that charges are a key determinant of future performance. This is because the return an investor will receive (on average) is the average market return, less fees and charges. Therefore, as many academic studies have shown, the higher the investment management fees, the lower the returns are for investors.

This isn’t to say that an actively managed fund that has relatively high fees won’t outperform the market in any one year. It may well do so – but outperforming the market every year is unlikely. Furthermore, that sustained outperformance will be needed in order to offset the impact of the higher fees, which year-on-year will be eating away at the overall returns that investors receive.

For this reason, it’s worth checking the fees and charges that apply in every investment decision. The good news is that this should become easier under incoming EU legislation (the Markets in Financial Instruments Directive II, known as MiFID II). This will require investment managers to disclose all of their costs fully, including any previously hidden costs such as those associated with research and trading. Indeed, research from Lipper has estimated that these hidden costs will be in the region of 1.80% p.a. on top of any reported fund charges.

At Moore Stephens, we have always advocated a low-cost approach within the internationally diversified portfolios we recommend. For example, the total cost of our recommended portfolios, including our advice, custodian fees, wrap platform charges and all of the underlying investments, is typically less than half of the total cost, including research and trading costs, of an average managed fund. As research studies keep on showing, it’s an approach that makes good sense and encourages higher returns.

For more information, please click here to contact the Wealth management team.

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