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Knowledge is Power

Liv Lewis-Long, of Simplicity, casts a close eye over small percentages and how fees can have a big impact on your nest egg.

7 May 2024

Familiar with the old saying, “There's no such thing as a free ride” ... well, this certainly applies when it comes to investing.

When you decide to invest in KiwiSaver, a managed fund, or individual shares, you’re certain to encounter fees of some type. While they may appear insignificant, fees can really add up, significantly affecting your overall investment returns over time.

Here, knowledge is power: understanding how fees function and their potential long-term impact will allow you to optimise your personal investing choices.

Types of investment fees

Investment providers charge a range of fees on their products, generally intended to cover costs as well as allowing them to make a profit. KiwiSaver and managed funds usually charge annual management fees, which represent a percentage of your total investment.

For instance, a one per cent management fee means the fund will deduct one per cent of your total investment balance each year. Funds may charge additional fees such as entry and exit fees, membership, performance or adviser fees.

Usually, fees are deducted from your returns or balance automatically, or impact the unit price within the fund. So, it may be easy to forget that you’re actually paying them (unlike your power or phone bill). While fees vary in type, how they’re charged and amount, investment fund providers must disclose them in their Product Disclosure Statement.

Active vs passive fees

Management fees vary across providers and funds. Passive funds, which follow an index, typically charge lower fees. Simplicity, for example, has single-sector index funds that charge between 0.10 per cent and 0.15 per cent. Two of InvestNow’s Vanguard-based index funds charge an even lower 0.03 per cent annual management fee but add a 0.50 per cent transaction fee on buying and selling.

Actively managed funds tend to have higher expenses than their passive counterparts. Since their managers are actively trying to outperform given benchmarks, higher fees cover the additional costs associated with evaluating and selecting investments.

Actively managed funds commonly charge management fees of one per cent or higher, depending on the investment mix and fund type. But how do we find the fees? Most major managed funds readily publish their fees on their websites. This information must also be available in the Product Disclosure Statement, available on the company’s website.

If you’re investing via a third-party platform like Sharsies, Hatch or InvestNow, you should also be able to find what the fees are within that platform.

Real world impact

Let’s illustrate the impact of fees over 25 years, with a (fictional) example. Imagine you and a friend each had $100,000 to invest. Both of you opted to invest the lump sum into funds that both happened to have consistent annual returns of seven per cent over 25 years. However, you chose a fund with a 0.25 per cent annual management fee, while your friend’s choice charged one per cent.

Not a big difference, right? Let’s review the impact of these fees over 25 years, keeping in mind this example is very simplistic and doesn’t take into consideration tax, market conditions, varying annual performance, withdrawals or other fees that could be charged or changed.

Assuming identical performance year on year, your investment would have grown over the 25 years to $511,914. In contrast, your friend’s investment would reach $466,146. That’s a fee difference of $45,768 and a 46 per cent higher return on your initial $100,000, demonstrating the compounding effect that higher fees can exert over time.

Long-term impact

To really understand how much fees can impact your investments, it’s worth taking an even longer-term view, like you typically would in KiwiSaver.

Given the complexity and impact of income levels, employer and government contributions on KiwiSaver funds, let’s imagine another investment fund calculation. We’ll go with a typical Kiwi growth fund. According to Sorted’s Smart Investor Tool, average growth fund returns over five years would be 7.32 per cent. And while past performance is not an indicator of future returns, we’ll use this average in our simplified example.

Let’s say a young investor began with $1,000 in this imaginary growth fund and contributed $5,000 at the start of each year (equivalent to just under $100 a week) over their 45-year career.

We’ll start with our annual one per cent management fee and assume the 7.32 per cent average returns persisted throughout this period. While seemingly small, over 45 years the one per cent fee would add up to over $160,000 deducted from their account and their final balance would reach around $1.26 million. However, a lower 0.25 per cent fee over the 45 years would total $48,000, leading to a final investment balance of around $1.58 million. That’s a difference of $326,000 to spend in retirement.

Investment options

You can compare a range of investment options in NZ by visiting Sorted’s Smart Investor tool and filtering by your preferences. It will spit out a list of available funds. Results are sortable by fund type, past returns and fees, providing a straightforward comparison with your current fund if you’re already investing.

Of course, fees aren’t the only consideration when making investment decisions ... they’re just one piece of the puzzle. Other factors to consider include historical performance, customer service, investment strategies, environmental, social and governance (ESG) criteria, technology, and the people behind the fund.

You don’t necessarily get what you pay for

Many will argue that what truly matters is an investment’s after-fee returns. And while high fees charged by actively managed funds may be justified if they outperform comparable indexes on an after-fee basis, historical data suggests this is uncommon over the long-term.

According to S&P Global’s SPIVA reports, the performance of actively managed funds often lags behind that of their benchmarks. For instance, over the past decade to December 31, 2023, 87.42 per cent of large-cap active funds underperformed the S&P 500 index*.

There are plenty of things investors can’t control, including market trends, inflation, individual business decisions and central bank policy. But one thing you can control is the amount you pay in fees. Higher fees don’t necessarily translate into better after-fee returns. In fact, global research points to the opposite.

Disclaimer: The information provided and opinions expressed in this article are intended for general guidance only and not personalised to you. These materials do not take into account your particular financial situation or goals and are not financial advice or a recommendation. Information is current at the time of writing, and subject to change without notice. *The SPIVA Institutional Scorecard results showed that 87.42 per cent of All Large-Cap funds underperformed the S&P 500 over the 10 years to December 31, 2023. For the latest SPIVA Scorecard results for markets around the world, go to https://www.spglobal.com/spdji/en/research-insights/spiva/.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.


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