The impact of cost on returns
As investment professionals, we accept that we cannot control the movements of the market. We therefore focus on those things we can control, such as costs and asset allocations.
When investing money, we aim to maximise returns while minimizing risk. Therefore, efficiency and reducing charges is important. In a process where we may be expecting to generate annualised growth of 5% or 6%, a 2.5% ongoing fee can have a substantial impact over time.
At Atticus Financial Planning we favour passive funds over active funds for the following reasons:
- Most fund managers don’t outperform their index or benchmark over the medium to long term.
- Gary Brinson (studies conducted in 1981 and 1991) and Roger G. Ibbotson (studies conducted in 1983 and updated in 1989) conducted separate studies that have proved to be foundational to the development of modern portfolio theory. These studies show that that over 90% of a portfolio’s return is derived from overall asset allocation (proportion in shares, gilts, property, geographical regions, specific industries etc.) rather than stock selection or market timing.
- Passively managed funds typically have lower charges and help to keep costs down while providing the investor with the average return of the market.
Now, we understand that not everyone agrees with us. In these situations, we have access to a wide range of actively managed funds, should these prove to be the most suitable option following our initial discussions.
Impact Investing
More and more investors are keen to invest their money where it will make a difference.
In the past, this has been purely down to ethical considerations and a desire to improve society, the environment or workers' rights.
Previous attempts at ethical investment have been stymied by the relative nature of ethics itself. In other words, what may be considered ethical by one person may be considered unethical by another.
In addition to this, ethical investment was often accused of narrowing to a dangerous degree the range of investment choices available to a fund manager, resulting in more volatile and risky returns.
However, there has recently been a move toward investing in companies that show a good record in terms of:
- Positive impact on the environment
- Positive impact on society and their community
- Positive impact with regards their own internal governance
By investing in these companies, it has been shown that an investor’s outlay can have a really positive impact. Furthermore, companies which measure favourably on these Environmental/Social/Governance metrics, also tend to demonstrate higher levels of long-term growth and better management, with a focus on the long-term future of the company rather than short term gains.
There is now an increasing demand for funds that can offer societal renewal, environmental regeneration and improvement of workers’ rights, while still offering good returns.
If this is something you would like to discuss further, please contact us.
General (where there is capital at risk)
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
