There is a lot of focus these days on charges so much so that passive funds, otherwise known as index trackers, have become very much the flavour of the month. There is a common misconception that low charges are the ‘be all and end all’ of investing in order to achieve superior returns but in fact, nothing could be further from the truth. Like everything else in life you really do get what you pay for.
Whilst fund managers, financial advisers and the investing public have got carried away with the attraction of passive funds what they have failed to recognise is that fund charges, whilst important, are not the primary factor behind fund performance. Low charges are important when funds have the same strategy such as tracking a particular stock market index such as the FTSE 100 Share Index because two different funds are investing in the exact same stocks. The fund with the lowest charges will always outperform the more expensive fund.
However, what if the strategy, investing in the 100 companies that make up the FTSE 100 Share Index is a poor one? Based on the last 12 months’ performance of the FTSE 100 the strategy has been a poor one because the index has fallen by 9% at the time of writing. Oh, and by the way, that means that after deducting the fund manager’s low charges the tracker fund has underperformed the index.
So what are the 3 factors that determine the highest investment returns for investors?
- Charges.
- Investment strategy.
- Taxation
You see if you invest your money in a tax wrapper such as an ISA or a pension you can achieve tax savings of between 10%-45%. Also if you invest in a superior strategy such as the CCM Intelligent Wealth Fund, which has returned, in excess of 11% at the time of writing** over the last 12 months, then your extra return could be 15%-20% more over a given 12 months period than the FTSE 100 index. I think you will agree that such tax savings (up to 45%) and extra investment returns (up to 20%) make the debate over fund manager annual management charges, AMCs, of 0.1%-1.5% p.a. irrelevant.
I recently read a book called More Money Than God by Sebastian Mallaby. It is a book about hedge funds written ten years ago. In it, the author explains that hedge fund managers charge 1%-2% p.a. as well as a 20% fee on any profits the fund makes. By any measure, these are hefty fees but get this. Hedge funds’ average returns net of charges exceed those of average traditional fund managers who charge far lower fees.
Unfortunately, hedge funds are only generally available for very wealthy private individuals or institutions. In the US a number of universities such as Yale routinely include hedge funds within their endowment funds in order to spread the risk by diversification and to achieve higher investment returns from an uncorrelated asset class.
The CCM Intelligent Wealth Fund has achieved a return net of charges of 11.33% over the last 12 months despite charging an OCF of 1.2% p.a. That is a far greater return than that of any FTSE 100 Share Index tracker fund over the same period despite their typical AMCs being around 1% p.a. lower than our fund’s AMC.
There is a growing argument that index tracker funds have created a giant bubble that will one day burst. That’s because once shares enter an index they are automatically bought by passive funds. A good example of this is Tesla which recently joined the S&P 500 Index which increased the value of the shares by 13% on the day of admittance. The shares were already ridiculously over-valued on the Nasdaq Index before their price was boosted even more because index tracker funds had to automatically buy the shares.
This routine indiscriminate buying of shares isn’t based on careful, studious analysis like the research we put into selecting shares for our fund. So prices of shares in index tracker funds are being pushed higher and higher to unrealistic levels. When the bubble finally bursts I predict passive funds will have had their day. Active funds such as the CCM Intelligent Wealth Fund will then come into their own. That day isn’t very far away in my opinion.
So the message is not to get too hung up by the annual charges of your fund. Make sure you use a tax wrapper wherever possible such as a pension or an ISA and invest in a fund with an excellent investment strategy. Remember it’s both the tax wrapper and the investment strategy that will deliver you above average returns, not the annual management charges. After all the difference between a charge of 0.5%, 1% or 1.5% is neither here nor there when double-digit tax savings or extra investment returns can be achieved which will far exceed a relatively insignificant increase in charges.
Index tracker funds are very much flavour of the month because of their low charges but remember the low charges reflect the fact that you are not paying for research. All you are paying the fund manager to do is blindly replicate the constituents of an index. The passive fund will simply follow the direction of the index. If you are invested in the wrong index and it underperforms, then the low charges will be scant consolation for the poorer return you have achieved. Index tracker funds have low charges for a reason. You are getting what you pay for.
So if you are interested in investing in an actively managed fund with excellent investment performance prospects consider investing in the CCM Intelligent Wealth Fund. You know it makes sense*.
*The value of investments and the income from them may fall as well as rise. Consequently, you may not receive back the amount originally invested. This communication is for general information only and should neither be construed as constituting advice nor be relied upon in making any investment decisions nor an invitation to consider or subscribe for shares in the CCM Intelligent Wealth Fund. You are recommended to seek competent professional advice before taking any action. Any statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change.
** The CCM Intelligent Wealth Fund’s return in the calendar year 2019 was 14.56% which is the only full calendar year for which past performance figures are available. For the last 12 months up until 8th December 2020, the fund’s return has been 11.33% (source: Funds Library). The FTSE 100 Index return for the same period was 12.1%.
The fund’s benchmark is the Global Index – Investment Association Global Sector, not the FTSE 100 Share Index.
