Spectacular claims are very misleading

Why do investment funds make spectacular marketing claims with no reference to the actual purchasing power of the currency, adjusted over time?

I have been investing into a retirement annuity for 30 years and I am quite satisfied with the investment performance. This is because I have always been aware that projected maturity values are meaningless, because they are seldom adjusted for inflation. The same applies to claims of past performance.

For instance: “The Old Mutual Investors’ Fund – in which R339.79 invested at inception 50 years ago would be worth R1 million* today”. (The asterisk with footnote pointed out that commissions and tax had not been deducted from the investment growth numbers).

No doubt the claim is correct in purely numerical terms. It represents a profit of more than 294 000 percent. All very well and glamourous, but while R339.79 will scarcely pay for a basket of groceries today, in September 1966 this paltry sum had the purchasing power of about R24 600 in today’s money, after adjusting the figures by monthly consumer price index inflation. Not quite such a tiny sum to invest for 50 years then.

Also, R1 million in 1966 would have purchased what would require more than R72 million today. So the numbers are meaningless unless described in terms of the purchasing power of the time.

Using an inflation calculator (www. inflationcalc.co.za) let’s re-write the investment claim, using time appropriate figures. In September 1966: “R339.79 invested at inception and left in the fund for 50 years is projected to be worth the future value equivalent of almost R14 000 by the year 2016.”

This would have been recognised as an excellent real return, because in 1966 you could buy an average suburban house for R14 000. In September 2016 a more realistic