If you are considering investing your primary concern will probably be the performance of your investments. However, performance isn’t all you should be concerned about. The charges you pay can have a significant impact on your returns. Unnecessarily high costs coupled with poor returns can eat away at your investment. So how can we help you understand what to expect in charges, what represents good value and the different charging structures available for the different types of funds available?
The cheapest way to invest is through passive funds, tracker fund or ETFs (Exchange Traded Funds). These funds aim to mirror or ‘track’ the performance of any of a number of worldwide stock market indices, such as the FTSE 100 Index. Your investment rises and falls with the index and there are no fund managers to pay. Instead, your investment is run by a computer which aims to follow the index you have chosen as efficiently as possible. Typical charges for a tracker fund are between 0.3% and 0.6% per annum.
Tracker funds work well in a rising or bull market, although you have no chance of actually outperforming the market. In a falling market, a tracker would simply follow the market downwards; there would be no intervention from your fund manager, because there isn’t one. In other words, there is no protection from market falls. With tracker funds, diversification is particularly important. If tracker funds are of interest to you, your Sterling & Law adviser will conduct a risk assessment and then help you identify the right combination of tracker funds for your portfolio with the correct asset allocation (the right amounts in various worldwide indices). Our adviser’s charge (anything between 1% and 0.5% should be added the tracker fund charge.)
If you’re looking to make a potentially higher return on your investments than a fund that tracks an index, investing in a fund that is actively managed by financial professionals might be suitable for you. With actively managed funds, a team of fund managers buys and sells investments aiming to outperform the market or a particular benchmark. This is opposed to passive funds, such as tracker funds, which simply aim to mirror or track a particular market or sector. Typical charges for a managed fund are between 0.8% and 1.5%.
An expert fund manager and their team will make decisions about both the overall strategy and balance of the fund, such as what proportions to invest in which sectors or countries. Managed Funds have higher fees than passive funds, due to the fund being managed by a fund manager. Managed funds are also able to take positions in a falling or bear market to protect capital by moving funds into more secure assets such as cash and fixed interest securities. Again, diversification is important and the best way to invest in managed funds is to put together a blend of fund managers (a portfolio) who are experts in their individual field and complement each other. It is important to note that managed funds go off the boil from time to time. If this happens, your adviser should be in a position to advise you that it is time to consider a change. This however takes time and effort and therefore, our charges for managed funds are typically higher than they would be for manager of manager funds (discussed below). If managed funds are of interest to you, your Sterling & Law adviser will put together a portfolio of managed funds based on your risk assessment.
Manager of Manager Funds (Multimanager)
Based on the premise that no single fund manager can excel in all markets all of the time, the multi-manager approach is a means of investing where you can access a wide range of different fund managers through a single investment fund. Different markets require different investment approaches and skill sets, making it unlikely that any one manager will be the best, or the most appropriate, in all markets. By blending multiple managers, with and across investment markets, in a single fund, the multi-manager approach aims to reduce the volatility of returns.
With thousands of investment funds available in the market, making the right choice for your portfolio and refining it over the years takes time, investment knowledge and skill. Fund managers need to be monitored continually to ensure they remain at the top of their game – and replaced when they do not. Few private investors or financial advisers have the resources to do this properly. The multi-manager approach is highly flexible. It provides access to a ready-made, highly diversified portfolio of holdings in a single fund, where all manager selection, blending and asset allocation is managed on your behalf. Typical charges are between 1.2% and 2%.
Multi-manager funds can therefore be used as a complete one-stop investment solution and is Sterling & Law’s preferred investment approach. Costs can be higher than for single manager investment funds as there are two layers of charges: on the underlying investments and on the multi-manager fund itself. However, these additional charges are often a fraction of what it would cost an investor to buy and trade the underlying funds separately. This is partly because multi-manager fund providers with significant size and scale can negotiate very attractive rates with managers and do not pay up-front or exit fees when trading funds.