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Investing? Watch out for charges
Leinster Leader 7th November
PERSONAL FINANCE with Jill Kirby
More and more readers are aware of the combined dangers of taxation and inflation to their wealth. It was Lenin, after all, who said, "The way to crush the bourgeoisie is on the grindstone of taxation and inflation."
With higher taxation on the cards - whether direct or indirect - and higher price inflation (which is always the by-product of the real culprit, the inflation of the money supply by central banks) anyone with some wealth should be looking these days at ways to preserve it.
As regular readers of this column already know, leaving your life's savings in a bank deposit account is a guaranteed way to lose money, or at least the spending power that money provides. With official inflation running at close to five per cent (and true inflation probably much higher), and an automatic 20 per cent DIRT rate on interest, you are sure to lose money leaving it in a bank that pays you less than, say, six or seven per cent.
The only way to beat the double blow of inflation and tax is to secure a higher return, but from what? Property hasn't paid a decent rental yield since the great property boom began; most amateur landlords have been subsidising their tenants. Dividend yields from most publicly quoted stocks and shares aren't beating the inflation and tax rate either. And while many investors have been counting on capital gains in both these assets to justify the poor yields, the property boom has ended and there are real fears that overblown stock markets may be next to take a tumble. So much for capital gain.
Timing your entry and exit into any market is hugely difficult and neither professional nor amateur investors ever seem to get it right every time. Nor does everyone have the will or the desire to emulate the likes of the great investment guru, Warren Buffett, who defines his style of buying shares in companies (or often the entire company) as "lethargic": He buys mainly big, solid companies with strong income and profit streams and then holds onto them forever. This method has created thousands of millionaires amongst the shareholders of his investment company, Berkshire Hathaway in the past 40 years.
If you don't want to 'buy and hold', or you can't, but you still want to outperform deposit accounts, Buffett suggests you go the index fund route, in which you purchase units or shares in passively managed indices (of stock markets themselves which are comprised of companies in specific sectors or geographic locations) where the entry and on-going costs are low.
The other option is an ETF, an exchange traded fund, which itself trades on a stock exchange as a single share, but represents a bundle of companies, or commodities, therefore spreading your investment risk. An ETF, which you can buy yourself via an on-line trading account, (see National Irish Bank's low cost trading offers on their current account) has the lowest costs of all.
To compare costs, I recently checked out a high risk, but popular new investment option: China.
QUINN-life (see www.quinnlife.com) is noted for its low cost index funds and sure enough, they offer a China Freeway fund, which is comprised of the FTSE/Xinhua China 25 index - the top 25 Chinese companies listed on the Hong Kong stock exchange. There are no entry or exit costs and the annual management charge is 1.5 per cent of your fund.
This index has produced a massive 120 per cent return so far this year and an annualised return of 29.5 per cent since it started back in 2001. If you had invested €10,000 in this fund offered by QUINN-life a year ago, it would be worth €22,000 today out of which a charge of €330 would be deducted.
In proportion to the massive gain, this is a pretty low deduction, but if you had bought the same FTSE/Xinhua China 25 index in the form of an ETF you would have only paid a €20 transaction fee (via your NIB current account) and a 0.75 per cent or €160 annual management fee. (This is quite an expensive ETF - there are many others which range from 0.3 per cent-0.5 per cent.)
Meanwhile, other investment fund providers, like Irish Life have an actively managed India-China fund (run by Fidelity fund managers) which has also done very well - c.65 per cent per annum on average since 2005 - but the fees are high: a three per cent entry fee and a two per cent annual management charge. Over at the on-line bank, RaboDirect, their Chinese Equity Fund, (see www.rabodirect.ie) which is run by its parent group Robeco in Holland, has produced a massive 132 per cent return over the past year, even outperforming the Hong Kong 25 index, but it also has a 1.5 per cent annual management fee and an entry and exit fee of 0.75 per cent. (A Winter 'sale' means all entry fees are waived for the first two weeks of November.) Your €10,000 initial purchase would have been charged about €345 after growing to €23,026 gross over the year.
It's one thing to be prepared to pay for outperformance, as in the RaboDirect actively managed fund case. However, buying a passive index fund from an Irish fund provider when the same fund is already available in the cheaper, generic ETF form, seems a little crazy to me.
I accept that not everyone wants to set up a share account directly, preferring the 'convenience' of an Irish middleman but keep in mind that convenience comes at a price ... which may have a heftier price tag under different market circumstances.
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