MASTERS OF THEIR CRAFT REFINE THEIR SKILLS OVER TIME

There are no shortcuts to wealth creation. It’s about doing the right things at the right times, over and over again. We don’t believe in cutting corners or compromising on our values for short term gains.

Sep 06, 2016

7

You are never too young to start a
nest egg, ‘there is no excuse for
not saving’, ‘how much is enough
to retire on? Only 6 per cent of
South Africans save enough for retirement,
‘spending less is not saving’. We have heard
and seen it all in newspapers, magazines and
even on TV (ad nauseum).

At face value, these commonly heard
statements appear to have merit. The figure
below shows the indexed performance of the
Dow Jones industrial average from 30 June
1916 to present−quite a bit of data there.
This highlights that if you had invested one
unit of capital 100 years ago and reinvested
all dividends, it would be worth 1 242.72
units of capital today. Saving appears to pay
off rather well.

That is 1 242 times your original money, so the
argument goes that if you had decided to spend
that one unit of capital 100 years ago you
would forgo 1 242 units of capital today, which
sounds like a no-brainer: sacrifice your current
one unit of capital consumption to be able to
consume 1 242 units of capital in the future.

It is not exactly squirrelling away nuts for the
winter: it would appear that those nuts that you
buried a few summers ago, sprouted, grew
into trees, created more nuts, which fell off the
trees, sprouted, grew into trees, repeated and
so forth. The nuts would have multiplied to
such an extent that you wouldn’t know what to
do with them all.

How many nuts are you able to actually
consume? Saving seems such an easy game.

The size of the stash

Many are likely thinking: I’m not going to
be around in 100 years, so who cares?
And secondly, the more astute reader would
suggest that those are nominal returns and
need to be adjusted for inflationary effects.

While the first comment is a valid objection, the
argument will hold for shorter time periods as
well. The second comment is akin to saying ‘but
those nuts you have stashed away are much
smaller than the original ones, and you need
to adjust for the total mass of your stash and
measure these nuts as per the original size’. The
new nuts are ‘nominal’ rather than ‘real’.

Without getting into a debate about the
appropriateness of weightings and content of
specific inflation indices, the US Consumer
Price Index (CPI) is a decent enough proxy for
generalised US inflation – especially in the
long term. The US CPI level increased from
10.8 at the end of June 1916 to its current
241.038, as found by Bloomberg, essentially
meaning that the buying power of one unit has
diluted by 22.32 times. So the new 1 242.72
nuts are only 55.68 nuts in the original size
terms. Still not a bad outcome. With the money
that you would have spent on that luxury car
100 years ago, you can now buy almost 56
cars! Sounds like a worthwhile exercise in
frugality. Or does it?

8

Unfortunately, there’s the ultimate elephant
in the room: investment fees or total
expense ratios (TERs). Fees are charged
on nominal value and South African equity
general fund fees range from 0.17 per cent
to 5.34 per cent per annum, states Glacier
Financial Solutions, which excludes any
transaction and brokerage costs. So let’s
say the investor was charged 2 per cent
total fee per annum, how much would your
final investment be worth? Alternatively, how
many nuts would you have? Unfortunately
for the investor, due to those fees, the
nominal 1 242.7 nuts are reduced to a
nominal 171.5 nuts. In real terms, your
55.7 real nuts have reduced to 7.7 nuts.

That luxury car that you didn’t buy 100 years
ago can purchase you 7.7 luxury cars today.
That exercise in frugality has also bought
48 luxury cars for the investment industry.

So investment managers actually do care
about savings. They want their clients to save
much more and invest for a very long time.
In fact, there is no excuse not to start saving
early – that is a perfectly rational thing for
someone from the investment management
industry to suggest. Perhaps the real problem
with individuals retiring with too few nuts
saved is due to excessive ongoing fees rather
than original invested amounts.

It may sound strange that a hedge fund
manager is talking about lower fees, but the
paradox is that standard hedge fund fees of
‘1 and 20’ would have resulted in less than
2 per cent fixed fees over the 100-year
period shown above.

Next time you hear ‘Fees must fall’, think
about it really hard about what it means
before actually responding.

Written by Paul Crawford (Fixed Income Portfolio Manager)

IN THE PRESS

MORE FROM

IN THE PRESS

Oct 13, 2017

1st in Morningstars SA Asset Manager Ratings Q3

  See the full list below: Morningstar_Rating_Analysis_of_South_African_Domiciled_Asset_Managers_Q3_2017

IN THE PRESS

Oct 13, 2017

The Rise of Passive – Blessing or Curse?

Funds on Friday – Glacier by Sanlam

IN THE PRESS,INSIGHTS

Oct 05, 2017

Stock Watch-3 Oct 2017

Latest episode of Stock Watch with Jean Pierre Verster

IN THE PRESS,MEDIA

DISCLAIMER

Investors should take cognisance of the fact that there are risks involved in buying or selling any financial product and that past performance of a financial product is not necessarily indicative of its future performance. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. 

Hedge funds are portfolios of collective investment schemes and are regulated under the Collective Investment Schemes Control Act, 45 of 2002. Investments in portfolios of collective investment schemes are generally medium to long term investments. Collective investments are traded at ruling prices and may engage in scrip lending and borrowing. The manager of a collective investment scheme may close a portfolio to new investors in order to manage the portfolio more efficiently in terms of its mandate.


The information and documentation presented on this site do not constitute a solicitation, invitation or investment recommendation. Prior to selecting a financial product or fund it is recommended that investors seek specialised financial, legal and tax advice. Fairtree Capital (Pty) Ltd accepts no liability of any kind resulting from reliance being placed on any information contained on this website. Fairtree Capital (Pty) Ltd endeavours to provide accurate and timely information, but makes no representation or warranty as to the correctness, accuracy, completeness or suitability of any of the information contained on this website. The laws of the Republic of South Africa shall govern any claim relating to or arising from the contents of this website.

 


Yes, Please Proceed    Sorry I cannot Accept Terms