This month, I wanted to touch on something that may often be overlooked or merely accepted when comparing two different investments, namely, what a 1% difference in returns can amount to over a long-term investment period.
As independent advisors, a large part of the advice process we follow usually involves assessing a potential client’s existing portfolio before any advice is given from our side. We need to understand what is already in place and how the existing portfolio matches their specific needs and goals as well as going into the nitty-gritty of comparing products and underlying funds. We need to make sure that each client is in the most suitable products and following the correct investment strategy based on what they are working towards. If you are not in the correct products or funds targeting the required level of growth, how can you expect to achieve your goals?
Unfortunately, not all platforms or products are built the same, just as no two fund managers deliver the same returns. When we analyse a potential client’s portfolio, we are always trying to ensure they are invested on the best platforms, are invested in the most suitable products and their underlying funds are delivering the required outcomes, all at a fair price.
Generally, these comparisons often come down to small differences and may end up being differentiated by one or two percentage points (there are some scenarios where the difference is far more blatant). This may not come across as much and you may be left wandering, is it really worth the hassle to move my investment to a new platform or make a switch from my current fund manager into something new, based on a such a small difference? Well, when you add up the numbers over a long-term investment period, that little difference could amount to a significant benefit.
The chart below highlights that a 1% difference over a 20-year period can amount to an outperformance of just shy of R600,000 – a hefty sum by any measure and an additional amount anyone would be happy to have in retirement.
To illustrate, I have used a simple scenario of a R1 million lumpsum invested in two different portfolios generating net returns of 6% and 7% per annum over 20-years. The portfolio returns are net of platform fees and all costs, as it would be too complicated to try differentiating the differences of platform fees and product fees. So, I have simply worked on what the end client gets – the most important metric of success or mediocrity.
By simply enjoying a 1% outperformance, the investor earning a 7% return ends up R590,928 wealthier after 20-years. I am sure you can imagine what a 2% or 3% difference would amount to. The numbers become even more impressive when a regular contribution is added on a monthly basis and compound is allowed to take place over the full 20-year period.
The important point here is that this is your hard-earned money and you would expect it to be working hard for you! We put a lot of effort into our portfolios with Morningstar because we appreciate how important a 1% pick up in returns can end up being for our clients and their retirement outcomes. Having those models in place allows us to apply years of research, market experience and a proactive approach to looking after your hard-earned money, ensuring it is continuously working hard for you.