The secret to where most of your returns go
What are the first things you consider when you look at an offshore investment fund? Where it invests, its performance, or volatility? Maybe you even look at the size of the fund (to see if everyone else likes it) or how long its fund manager has been at the helm.
But what is it that really makes or breaks your investment?
Cost is actually the BIGGEST long term driver of returns within most offshore investment portfolios.
Think about that for a second – the biggest driver of returns. This is true in mature markets like the UK and US, and is partly the reason why low cost “passive” or index tracker funds have grown increasingly popular there.
Internationally, and particularly for expats who are exposed to the sales tactics of the less scrupulous offshore salesmen which make it their hunting ground, these charges can be much, much higher.
Leeching your returns
Even in relatively transparent markets, the list of charges applied by fund managers is staggering. These can include:
an annual management charge
a custody charge
an initial charge of 1% or 1.5%.
These charges (the Total Expense Ratio or TER) can typically average between 0.75% to 1.25% per year.
(FYI some active funds have a TER of 0.60% and upwards.)
This doesn’t even include what the fund vendor is likely to be charging which could be upwards of 3% and could reach as high as 8%!
Let’s leave aside the vendor charges for a minute though and concentrate on how the fund manager’s charges will impact your investment…
If you were to invest $100,000 into a fund, with an initial charge of 1% and total annual charges of 1.25% and assuming a very generous average growth rate of 7% per year, after 20 years, your investment will have grown to $297,888 – not bad, right?
Without these charges, which are actually quite low for funds available in the international market, your investment would have grown to $386,968. That is a difference of $90,000 – almost as much as what you invested in the first place!
The shortfall is due to the fact that, not only have you paid the company $42,103 in charges, but because these are taken from your investment each year, it lessens the amount being re-invested.
When you add to these costs the typical product charges levied by companies such as Generali, Friends Provident International, Zurich International, Quilter International, RL360 and Hansard, it is no wonder that investment performance can so easily get sapped away.
So what can you do?
One of the easiest ways of cutting down your costs is to use what are called passive or index tracker funds. You can also use a professional adviser who will be able set you up on the right international investment platform so you avoid making any expensive mistakes.