I have noticed an increasing trend for the media, investors, the regulator (the FCA) and even financial advisers to get totally hung up on charges virtually to the exclusion of anything else.  The debate rages on about whether the annual fees should be 0.5%, 1% or 2% p.a.  However, in my experience charges are the least important thing to worry about.  Let me explain why.

The three most important factors that will determine your investment returns, in order, are as follows;

  1.  What you are invested in.
  2.  How tax efficiently you are invested.
  3.  Charges.

 

It’s truly as simple as that.

Let’s explore each of these three areas.

What you are invested in

If you had invested in our top-performing CCM Intelligent Wealth fund over the last 12 months you would have achieved a return of 47% after paying an annual management charge (AMC) of 1.2%.  If instead, you had invested in the IA Global Index you would have achieved a return of 24.9% and paid zero AMC.  Which would you rather have invested in?

 

 

How tax efficiently you are invested

Assuming an investment of say £40,000 into the same two investments over the same time period but with one higher rate tax-paying investor investing through a personal pension and the other higher rate tax-paying investor just investing directly without any tax breaks results in the following;

 

Personal pension 

CCM Intelligent Wealth Fund                    IA Global Index

Investment                      £40,000                  £40,000

Tax relief @ 40%            (£16,000)               (£16,000)

Net cost                           £24,000                  £24,000

Sale proceeds                £58,800                   £49,960

Gain                              £34,800 (145%)        £25,960(108%)

 

Direct investment (without any tax breaks)

CCM Intelligent Wealth Fund                 IA Global Index

Investment                   £40,000                      £40,000

Sale proceeds              £58,800                     £49,960

Gain                               £18,800                     £9,960

CGT exemption           (£12,300)                   (£12,300)

CGT payable @ 20%    £1,300                             0

Gain net of CGT         £17,500(43.75%)         £9,960(24.9%)

 

So the extra tax efficiency of a personal pension resulted in an extra return of £17,300 (£34,800-£17,500) whereas for the IA Global Index the extra return was £16,000 (£25,960-£9,960).

 

 

 

Charges

The annual charge for the CCM Intelligent Wealth Fund was just £592.80 at a rate of 1.2% for the 12  months period assuming an average investment value of £49,400.

Summary

So to summarise, the combination of investing in the right area, the CCM Intelligent Wealth Fund, rather than in its benchmark index, the IA Global Index, and using a personal pension produced an investment return £34,800 net of tax compared to paying just £592.80 in charges.

Without any tax breaks and investing in a zero-cost index tracker (passive) fund the gain would have been just £9,960.

By investing in a better performing active fund in a more tax-efficient manner the gain was 249% (£34,800/£9,960) higher in spite of a higher annual management fee of 1.2% p.a. 

 

CCM Intelligent Wealth Fund

Personal Pension

 

Annual Management Charge £592.80 (1.6%)

Investment Gain – £18,800  (51.2%)

Tax efficiency Gain £16,000 (47.1%) 

 

Conclusive proof that what matters most is what you are invested in and how tax efficiently you are invested matters way, way more than charges (most of the time).  Of course, it is vital to avoid investing in high charging, poor-performing funds.  So the obsession with charges makes little sense when it is the least important factor in achieving superior investment returns.*  You know it makes sense.

 

* The value of your investment can fall as well as rise and is not guaranteed. The contents of this blog are for information purposes only and do not constitute individual advice.  You should always seek professional advice from a specialist.  All information is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of and relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.