Investors should prepare themselves for the flip-side of the drop in interest and inflation rates, Sidney Place of Stanlib Asset Management said on Wednesday.
Place, Stanlib’s chief investment officer, said in a statement that savings and retirement fund members had to face up to the reality of a ”single-digit return universe”, and a new yardstick was needed to assess the performance — the net return after all costs and fees have been deducted — of their investments.
Low inflation and interest rates meant that investors should expect only single-digit, nominal returns.
A new mindset was required in retail and institutional markets ”because 20% year-in and year-out will not apply anymore. It is not a disaster though, because the value of money is no longer being eroded by double-digit inflation”.
The media had focused recently on fees charged by asset managers, but the issues were more complex than simply looking for the cheapest fee scale, he said. The impression of a fee of 1,5% — against a return of 15% — would not be the same as the impression of a 1,5% fee against a return of 5%, for example.
Place said the Total Expense Ratio (TER) — the aggregation of all fees and costs — was a key issue, because high charges could no longer be absorbed by lower returns.
”To illustrate the point, a fee of 1,5% may not appear crucial when a 15%return is achieved, but if the total return is only 5%, then it is very significant indeed.”
Intermediaries serving both major, institutional clients and ”widows and orphans” could find that the relationship between returns and the TER was fast becoming The Next Big Thing, said Place.
Place said ”some sleight of hand” was often practised by the sellers of investment products when presenting costs.
Therefore, intermediaries should be well informed on how the TER was calculated and whether enough meat was left on the bone for clients after investment managers, custodians, administrators and intermediaries were paid.
Place cautioned investors, however, not to use the size of the TER as the sole reason to buy one fund rather than another. He said: ”Always examine what return is likely to be earned as well.”
Cost sensitivity, for example, brought a new dimension to the ”active versus passive investment” debate, he said. ”Passive” fund managers try to mirror the performance of a given index, while active managers aim to outperform a given benchmark.
An investor might prefer a passive fund charging only 0,2% a year for mechanistically shadowing an index, as opposed to one charging one percent, but with an active investment manager trying to out-perform that index.
”However, in an environment where a key index like the Standard & Poor’s 500 can lose 22% of its value as it did last year, paying ‘only’ 0,2% for the privilege of losing money in line with everyone else does not make sense.”
He said it was ”infinitely preferable” to reduce the rate of loss through the services of an active manager’s timely defensive positions. Paying more for an active manager out-performing the index by even a small margin ”is money well spent” if it kept the investor ahead.
”At first blush a higher fee looks worse than a lower fee, but if the net return is significantly in favour of the manager with the higher fee structure, then pursuing the cheap fee option is actually false economy.” – Sapa