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Here's what no-one told you about low-cost RA's…

by , 22 September 2017
Here's what no-one told you about low-cost RA's…
A week ago I was nearly convinced low-cost RA's are the way to go. I read a well written article on the web, promoting the virtues of low-cost RA's.

The article uses the following example:

Someone has saved R3 000 every month for 40 years into a retirement annuity (RA), and earns a return of 6.5% above inflation.

If you pay an investment fee of 3% you'd end up with R3 million at the end of 40 years. But with an investment fee of 1% you'd have a whopping R5 million!

That's R2 million in extra growth just by saving 2% in fees per year.

The article then goes on to show the top low-cost funds and what they'll cost if you invest in them, compared to traditional funds offered by Allan Gray and Coronation.

But the article skipped on a very important point…

Low fees don’t guarantee great performance

I did some research of my own.
What I discovered was shocking.
The low-cost investment funds underperformed by a lot.
Even considering their lower costs – they couldn’t beat even the highest cost competitor I looked at.
Look at my summary below:

What are the costs of ‘low cost investment funds’ really?

Sygnia’s Skeleton 70 Balanced fund is by far the cheapest option when it comes to fees. It charges a mere 0.63% of total costs. But the fund’s performance wasn’t that great over the last year, three years or since it started out…
10X is another low-cost provider – with a 1.23% total fee.
That puts it in the middle of the pack. Coincidentally, it also performs roughly in the middle of the four funds.
The two traditional asset managers, Investment Solutions and Allan Gray have roughly similar performance for their funds. They also charge the highest fees by far.
But here’s the thing, on a three-year basis, both high-fee funds still outperformed the low-cost fund by around 1%.
Now I know – this comparison doesn’t look at all the funds out there. So, it can hardly be called scientific.
But the fact I’m trying to bring across here is that you shouldn’t be fooled by the ‘low-cost’ marketing angle.
Low costs alone are not a sufficient reason to invest in an investment fund.
The fact is that there are investment funds out there that have proven their long-term returns are above average and consistent. And, they can outperform low-cost, passively managed funds by a wide margin.
Here’s to unleashing real value
Francois Joubert

Here's what no-one told you about low-cost RA's…
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