How to beat the city without having to join it

In today’s issue:

• Stocks beat cash, but how?
• Are fees undermining your returns?
• How to escape the funds management industry

If inflation is back with a vengeance, cash is a dangerous place to keep your savings. Especially if central banks allow inflation to rise above interest rates again.

Not to mention the tax we pay on interest earnings as inflation pushes us into higher tax brackets.

But investing your money can be a challenge. The time alone is a barrier. Not to mention the inertia of getting going. No wonder people entrust their money to the funds management industry. And then hope for the best.

But my friend Jasmine Birtles has other ideas…

She’s a people’s advocate for savings and investing. How to keep more of your own money and make more of it.

She’s also a bit of a financial sleuth. And she’s found a way to invest more of your money without having to hand it over to the fee generation machine of the funds management industry. Crucially, it doesn’t involve becoming your own fund manager either.

In typical style, Jasmine isn’t content to tell people about it. She’s out and about showing people. You might even get to meet her in person…

Nick Hubble
Editor, Fortune & Freedom

***

It’s time to stop funding your investment manager’s lavish lifestyle

I feel like I’ve spent most of my career as a financial journalist banging my head against a brick wall as I try to get readers to put their long-term money into stocks and shares rather than savings accounts. I encourage, cajole and almost shout at them to do it, but still they insist on putting their money into “safe” cash.

In the period from 2021 to 2022, just over 60% of new ISA subscriptions were for cash ISAs even though one estimate puts the average return on a Cash ISA at 1.21% per annum. It drives me nuts.

But then, what I often hear at the money management courses I run, is that those who have dipped their toes into the water and actually put some money into a stock market fund got burned. Usually they talked to their bank (never a good idea), or some dodgy advisor, and found their money was put into an actively managed mutual fund where the potential returns were trumpeted from the rafters but never materialised. After doing a bit of digging I find that the funds had extortionate fees that ended up eating into their profits.

Funny how little is talked about fees and how they are charged. No wonder more and more investors are going for the cheap, automated options that are flooding into the market.

Around 11% of UK adults choose to invest in mutual funds each year, according to Finder.com, and the bulk of those have high fees.

Mutual funds are usually promoted to pension-savers and risk-averse investors as a “safer” way to build long-term wealth. They are managed by experts (where have we heard that word before?) who can actively reduce your exposure to high-risk assets and prioritise safety. That’s the idea anyway.

But what many investors don’t realise is that this “expert” help comes at a price.

Brokerages charge high fees for funds that are actively managed. These can include management fees, exchange fees, account fees, 12b-1 (distribution) fees, custodial expenses, accounting expenses, expensive ratios, sales fees, and even legal fees. It’s only a matter of time before they add in “staring out of the window” fees, “using a laptop” fees and “spending the afternoon at the golf course” fees.

Many of the most popular UK mutual funds charge fees of 1% (or more) per year. If you are saving for a pension and have over £100,000 invested, the fund could be costing you more than £1,000 per year in fees alone. To make any gains your fund would have to be going up by 1% at least, and that’s not a guaranteed scenario.

According to MorningStar, 7.6% of UK funds charge annual fees of 2% or higher. Which would eat into your profit even more.

If you deposited £100,000 into a mutual fund and held it for a period of ten years, you would end up paying over £10,000 in fees. And that’s if you find a fund that charges the average 1% rate. Some will charge a lot more.

Frankly, I’d like to know how this is still allowed to happen. It’s a quiet scandal.

A lot of mutual funds defend their high fees by pointing to their returns and telling us that those make the fees worth it.

Hmm, maybe. Last year, the UK Large-Cap Equity generated returns of 7.93%. This meant that returns did easily cover of management fees, but it still means that the investors got significantly less from their own money than they could have done.

Luckily, UK investors have the option to invest in alternative assets that provide similar returns without these ridiculous running costs.

How to escape the funds management industry

Personally I very rarely invest in actively managed funds. I find the charges irritating and the returns patchy. Just when you think you’ve found a genius manager who has a great track record, that record suddenly gets broken and I experience in living colour that slogan they always trot out that “past performance is no guarantee of future returns.”

I much prefer cheap and easy index-trackers and ETFs (exchange-traded funds). And I’m not surprised that ETFs in particular are enjoying a time of remarkable popularity.

With ETFs you can track the performance of a basket of financial instruments, from the S&P 500 to gold to India. The funds are traded on exchanges so you can invest in them as you would any company.

Unlike actively managed mutual funds, ETFs are (mostly) passively managed. This reduces the overall costs of owning them. In particular, ETFs don’t come with high management fees.

It is possible to find some ETFs with yearly costs of just 0.05% (or lower)! If you invested £100,000, your fees would add up to just £50 per year. A tiny fraction of many actively managed funds.

For example, some UK ETFs with low annual fees include the Lyxor Core UK Eq All Cap (DR) ETF, which charges just 0.04% per year, and the iShares Core FTSE 100 ETF, which charges just 0.07% per year.

According to MorningStar, the best-performing ETF in 2023 generated an eye-watering return of 255%! This was the VanEck Crypto & Blockchain Innovators ETF.

Of course, not all ETFs generate such huge returns, but the performance of ETFs can be just as profitable as managed funds. The popular iShares UK Dividend UCITS ETF has seen returns of +8.78% YTD, which is similar to the kind of returns that you would expect from a managed fund. It’s no surprise that more and more investment companies are now concentrating purely on ETFs.

If you’d like to find out more about the lucrative world of ETF investing, come along to my FREE ETF Webinar next Monday (10 June).

I’m hosting it and I’ll have a panel of investors and financial journalists there who can answer any questions that you might have about ETF investing.

It’s completely free and you can sign up here. Come along and say hi!

Until next time,

Jasmine Birtles
Money Magpie