An article published in the Australian Financial Review last week provided some revealing data about average fee levels in the superannuation environment – Wake up to Super Fees.

The article reported the following broad fee levels:

Average fees charged by MySuper schemes for not-for-profit industry schemes             - 1.01%

Average fees for comparable retail funds                                                                   - 1.32%

Total fees charged on actively managed retail default funds with $100k balance                           - 1.10% to 2.39%

Total fees charged on actively managed retail default funds with $250k balance                           - 1.05% to 2.33%

Total fees charged on passively managed retail default funds with $100k balance                         - 0.55% to 1.09%

Total fees charged on passively managed retail default funds with $250k balance                         - 0.52% to 1.04%

The article goes on to debate that the performance of a particular fund is not just about fees.  There can be no question that the end outcome for a member of a super fund is the net return after fees and taxes.  However whether an active or passive approach will achieve that outcome will be the topic of endless debate.

The research we have considered at A Clear Direction clearly suggests that keeping costs low should lead to a better outcome, on average.  Investment approaches that utilize a passive, index based approach to building portfolios generate lower costs for clients and in our opinion provide better long term outcomes.  This is why index funds are at the core of our investment philosophy for building client portfolios.

So how do the fees stack up for A Clear Direction’s approach?

The ARF article suggests that the typical default balanced fund mix is 30% defensive and 70% growth. Based on a 30 / 70 asset allocation mix (30% invested in cash & high quality fixed interest, 70% in growth assets such as shares and property) the indicative administration and investment fees that clients of this firm are charged are:

$100k portfolio                     0.79%

$250k portfolio                     0.78%

Please note that here are adviser fees on top of those amounts, as there would be if an adviser was involved with any of the average industry fee levels mentioned earlier.  We believe that our fee level compares very favourably to the fees across the superannuation industry and therefore puts clients ahead of the game in terms of long term net returns after fees and taxes.

Regards,

Scott

The latest S&P Indices Versus Active Funds (SPIVA) Scorecard has been released in the US.  Australian investor might ask what has that got to do with investors here in Australia?  We think it is very important for two reasons:

1. Most likely 50% of an Australian investor’s international share exposure is invested in US companies.
2. Academic research continues to show that the largest share market in the world provides a guide as to what will and does happen in markets around the world including the much smaller Australian share market

So what does the latest report tell us?

Yet again the US SPIVA Scorecard finds that active fund managers, those charging significant fees and spending significant resources to choose investments that will beat the average market, are failing to beat the benchmark S&P Index.

For the twelve months to the end of June, 2013:

• 59.58% of large cap funds,
• 68.88% of mid cap funds,
• 64.27% of small cap funds,
• 62.59% of global funds,
• 65.86% of international funds, and
• 74.53% of emerging markets funds all underperformed.

The only winning sectors for active managers were the US small cap growth sector and international small cap sector.

The five year data was even more condemning of active managers.

(Refer to the full SPIVA report for further details.)

What are the lessons for investors in Australia?

The key lesson for us Australian investors is that we need to be very careful in employing active fund managers as all we may be doing is helping the fund managers to buy their yachts, mansions and expensive cars and not actually providing any value to our portfolios.  Many studies show that a key reason for the underperformance is the extra fees that have to be paid to the fund managers.  This creates a headwind that is difficult for them to overcome.

There are many other reasons and we encourage you to take a look at our research pages to understand more about why active managers are not likely to be a great investment choice.

Please be in contact if you would like to discuss how to apply this research to your particular circumstances – scottk@acleardirection.com.au

Regards,

Scott

For many years I have followed the writings and podcasts of Paul Merriman, a financial adviser based in the USA.  Recently Merriman has retired but continues to write and publish on financial advice particularly investment advice topics.  In a recent article 10 do's and don'ts for retirement investors he looks at 5 key dos and 5 key dont's in retireement.  Even though the comments are focussed on retirees in the US the broad concepts are just as relevent for us here in Australia.  So here are the 10 items for your consideration:

Retirement do’s

1. Do take advantage of “the only free lunch on Wall Street” by building a diversified portfolio of mutual funds (managed funds in Australia). This will reduce your risk and probably increase your returns.

2. Do buy funds with the lowest possible expenses. The average equity fund charges more than 1.3% a year, yet you can get most of the asset classes you need in good funds for a full percentage point less than that. This is equally important for bond funds.

3. Do buy index funds instead of actively managed ones. This will be a big help in achieving both of the prior “do’s” I mentioned.

4. Do invest in equity asset classes with long histories of successful returns. Based on years of careful study by academics I trust, this means U.S. large-cap blend, U.S. large-cap value, U.S. small-cap, U.S. small-cap value, international large-cap blend, international large-cap value, international small-cap blend, international small-cap value, and emerging markets. And for tax-deferred accounts only, it means U.S. REITs. (In Australia the asset classes include Australian large-cap companies, Australian value style companies, Australian small-cap companies, International large/value/small cap companies, emerging markets and Australian and international REITs)

5. Do invest in the most tax-efficient manner. Unless you have unusual circumstances, that means maximizing your IRA and 401(k) accounts and (when you’re living off your money in retirement) using up your taxable accounts first. (In the Australian context this is about effectively utilising superannuation and superannuation pension accounts)

Retirement don’ts

1. Don’t pay a sales commission to buy or sell a mutual fund. The commission is money that’s gone forever from your nest egg, and it inevitably and permanently diminishes the return you will get. (In Australia you can no longer buy funds that have commissions attached but any existing managed funds may still maintain a commission structure.)

2. Don’t buy funds in asset classes with low expected returns or high levels of risk relative to their expected returns. Among the most prominent examples of asset classes you should avoid are commodities, gold and technology stocks. In addition, I think you should steer clear of pure growth funds, whether they invest in large-cap, midcap or small-cap stocks — and this includes international funds as well as U.S. funds.

3. No matter how much you are attracted to an active manager, don’t buy actively managed funds. This is really another way of stating my third point above. Actively managed funds are guaranteed to have higher expenses than index funds, and their returns aren’t likely to be as high as those of index funds.

4. Don’t speculate with your portfolio, even a small part of it “for fun.” If you have a properly diversified portfolio along the lines that I recommend, your investments will include all the “great opportunities” you will ever need. Speculating and playing the market will almost surely reduce your long-term returns. 
   
   If you absolutely can’t resist trying your luck, then spend (notice I am not saying “invest”) a bit of money that you can afford to lose and buy a lottery ticket.

5. Don’t get snookered into thinking you have found a guru or anybody else who knows what will happen to the market in the future beyond statements such as “Stocks will go up in the long run.” Many people claim to have that knowledge, but nobody does. The sooner you can accept this fact the sooner you will be in touch with reality. 
   
   When you are in touch with reality, you are likely to invest more intelligently and productively.

These are great insights from a man with many more years of experience than me and well worth consideration for you investment portfolio.

Regards,

Scott

No matter what your opinion is on where investment markets will go next, one area of agreement is that markets have been volatile in recent years.   Nobel Prize Winner – William Sharpe – has recently provided his thoughts on investing in a turbulent market for the Stanford Graduate School of Business where he is a professor emeritus of finance - William Sharpe: How to Invest In a Turbulent Market

We think highly of Sharpe’s work and it forms a major part of the investment philosophy we use to develop investment portfolios for clients.

So has Sharpe’s views changed since the GFC started in late 2007?  In a word, NO.

In the Stanford article Sharpe provides an overview of his four pillars of investing - Diversify, economize, personalize, and contextualize.

In a nutshell these pillars are:

Diversify – invest in a broad range of shares and bonds – preferably all of them.

Economize – keep costs low.

Personalize – make invest decisions that are most appropriate for your own situation.

Contextualize – the price of an investment reflects the average opinion of investors about its future.  You may think your opinion is superior, but it pays to be humble, investing in the market rather than trying to beat it.

Sharpe provides some really important concepts that in our opinion should be the basis for developing a successful investment philosophy.

Regards,
Scott

I follow the Humble Savers twitter feed to keep abreast of what is being discussed about financial planning services.  A recent article – Financial Adviser Fees – the Cold Hard Facts - puts into question the fees being charged on investment portfolios suggesting that ongoing fees for a $200,000 investment portfolio could be 2.55% of the value of a portfolio with establishment fees of  $4,500.

I don’t doubt that this is a reasonably common fee structure in the market place but not all advisers are charging so extravagantly.

So what are the fees at A Clear Direction?

I have looked at an all share based portfolio.

Establishment fees would be in the order of :

 Plan Fee - $1,100  (may be more if there are other complex aspects to consider)

Investment fund buy/sell spread - $275

Administration Service transaction costs - $105

Total - $1,480

This is $3,000 less than the article suggests you might be paying.

Ongoing adviser fees would be in the order of: 

Adviser Fees - $1,100   (0.55%)

Investment fund fees - $750   (0.37%)

Administration Service fees - $525   (0.26%)

Total - $2,375   (1.19%)

These are less than half of the proposed fees in the Humble Savers article.

We at A Clear Direction are totally conscious of the fact that higher fees burden the long term returns promised by portfolios and have worked hard to drive down the costs of doing business through removing unnecessary administrative costs of doing business, providing a sophisticated investment approach which realises keeping costs low is important and sourcing high quality administrative services at the lowest cost available for clients.

The costs to set up, administer, monitor and review an investment portfolio does not have to be outrageous and can allow you to focus on what’s important in your own life rather than having to worry about your financial planning.

Regards,
Scott