Nathan believes that costs should be as low as possible, and investors should only be charged 1% to 1.5% at most. He explains that, considering that you are generally receiving 10% a year in returns in a long-term balanced portfolio, the fee is 15% of your return.
“But it’s much worse in the long run because of the compounding impact. So you really have to manage your total fees, and you must ensure you are getting value for whatever fees you are paying,” he says.
WILL ACTIVELY MANAGED FUNDS SURVIVE?
Elize Botha, the managing director of Old Mutual Unit Trusts, which promotes passive and active funds, says there is still a place for actively
If you want to invest in actively managed funds, there are ways you can cut costs. For starters, loyalty can save you some money.
Chad Sharrock, a financial adviser at Attieh & Associates, says: “If you invest through an asset management company’s own funds, the fees would tend to be cheaper.”
You could save on advice fees because it’s not impossible to choose your own funds. However, although the Effective Annual Cost standards have come into effect, which enable you to compare apples to apples, you may still benefit from financial advice, particularly as there are so many unit trusts on the market – reportedly about 1 300 and counting – to choose from.
Finally, you could save by not using a fund platform.
Ultimately, choosing funds with lower charges will most likely ensure out-performance. This is according to Morningstar, which released analysis last year in a report entitled Predictive Power of Fees: Why Mutual Fund Fees Are So Important. It showed that funds with higher charges are not only more likely to underperform, but may shut down all together.
According to Morningstar, using expense ratios to choose funds helped in every asset class and in every quintile from 2010 to 2015.
“For example, in US equity funds, the cheapest quintile had a total return success rate of 62%, compared with 48% for the second-cheapest quintile; then 39% for the middle quintile; 30% for the second-priciest quintile; and 20% for the priciest quintile. So, the cheaper the quintile, the better your chances. All told, cheapest quintile funds were three times as likely to succeed as the priciest quintile,” said the report.
This can only be good news for those who want to invest on the cheap.