Amnesia antidote: what’s the difference between client and investment performance?

Short answer: a huge difference. Sheetal Radia explains why it’s a mistake to get hooked by fund performance.

investment

Investment performance is the headline performance achieved by a fund.  Client performance is the fund performance after the costs of the fund have been taken into account.

For example:
Investment fund performance: 6%
Cost of investing in the fund: 2%
Other costs: 1%
Client return: 3%

In the above simple example, even though the fund generated returns of 6 per cent after all costs the client receives 3 per cent before taxes (where applicable) and inflation. If inflation is 3 per cent then the fund has delivered a zero return in “real” terms (or after inflation).  Returns could be even lower if there are entry and redemption charges, differences between the buying and selling price of the fund and performance fees.

Now, this does not mean that we should all invest in low-cost finds, rather invest in funds that can deliver value for your money. Value for money is a concept we use in everyday life but not as much as when it comes to investments. Identifying value and assessing it is not as easy as it sounds. Often looking at only headline performance is like living in a one dimensional investment world. However, paying attention to cost adds a second dimension (the third dimension is risk but that’s for future post) although the costs of investing are not always clear.

So ask yourself this if I have invested in funds do I know what charges I am paying to invest? Do you know your funds’ Annual Management Charge (AMC) or better still its Total Expense Ratio (TER)? What other charges (e.g transaction costs, entry and redemption charges etc) do you need to take into account?  To find information about charges start with the Key Information for Investors Document (KIID) and then look at the prospectus.  If you then want to know if the funds you have invested in are providing value then perhaps it may be a good time to seek advice and consider a portfolio review to see if it still aligns with your goals and not the market.

Ultimately, don’t get hooked by the fund performance (ie how much it has grown), what should matter to you is what you’re actually getting when any charges have been deducted (by fund managers, financial advisers, portfolio managers, etc). That is client performance.

Please note the value of pensions and investments can fall as well as rise. You may get back less than you invested. Speak to a financial adviser to make sure you get the best advice for your investments.