nicholas burton, offshore marketing manager at royal skandia It is a well-established fact that ma...
nicholas burton, offshore marketing manager at royal skandia
It is a well-established fact that many professional advisers rely to a large extent on fund performance when designing and monitoring an investor's portfolio for 'investment success'.
The inherent dangers of cherry-picking stocks or funds based on past performance are well-documented. You may or may not agree that past performance is a reliable indicator of future performance. Whatever your opinion, any comparison of two or more variables should be on a 'like for like' basis.
The past performance of long-only funds are inevitably compared relatively - relative to an appropriate sector average, for example. But, it would be folly to compare the relative performance of, say, a UK equity fund to a specialist sector fund.
Not only are the investment mandates and risk profiles dissimilar, for example, but the underlying management charges and total expense ratios (TERs) are also likely to differ.
A similar logic can be extended to the unfortunate comparison of mirror funds and the underlying collective funds in many offshore expatriate markets. It is true that many mirror funds invest solely into the underlying collective vehicle. The term 'mirror', therefore, reflects the fact that the 'life' fund normally 'mirrors' the investment strategy of the underlying vehicle in which it invests.
As such, you would expect the TER of the mirror fund and the underlying vehicle to be identical. However, many life companies use mirror funds as a mechanism to take policy or wrapper charges. As such, performance is not exactly 'mirrored'.
For example, many offshore plans take policy management charges within the unit pricing of the mirror fund, as opposed to separately cancelling units from the investor's policy. Collecting wrapper charges in this way will, other things being equal, result in slightly differing performance between the two funds.
To use a simplified example, should the investor take out a policy with a 1% management charge accounted for in the unit price you might expect to see that 1% appear in the performance stats of the fund over the course of a year. Over five years, you might expect to see the performance differ by around 5% and so on.
On the other side of the coin, the investor has a higher number of units in the fund - none have been cancelled to collect the policy management charges. For life companies who cancel units to take policy management charges might have relative 'underperformance' of the product structure.
The comparisons are, therefore, futile unless you compare both the policy/wrapper and fund charges together. Read the small print - the fund performance statistics in front of you may have important small print.
Surely what matters is the combined effect of policy and fund charges together, and the potential impact these have on projected fund and maturity values. Management charges and TERs are invariably higher on specialist or actively managed funds when compared to, say, index tracking funds, and this may or may not be a price worth paying for potentially superior investment performance.
On the contrary, a regular policy management charge of 1.5% pa will always impact investor returns more than one of 1% pa - regardless of the mechanism for taking the charge.
Senior Managers Regime
Interest rate outlook unchaged
FCA made demands last week
'Unsung' part of FSCS work