Has your portfolio been underperforming?

Has your portfolio been underperforming?

Quite often we bring on new clients who are dissatisfied with the advice they are currently receiving from other advisory firms, or are concerned since the level of service they were promised has failed to materialise.

More often than this however, we speak to people who are not unhappy with the advice they are receiving, when in fact, seven times out of ten, they should be.

This is because of drastic underperformance in their portfolio. Believe it or not, we still come across people who are DOWN over the last 5 years, even when many markets have been providing great returns. The S&P 500 has returned just over 50% in the last 5 years. In fact, an investment of $1000 into the S&P 500 made in November 2014, would now have a value of $1659.04 (with dividends reinvested).   

Evidently, to match this performance exactly would require full exposure to equities, which is rarely in line with anyone’s risk appetite. However, even a small exposure would have helped your portfolio to grow.

If my portfolio is down right now, why?

Typically, there are three main controllable factors that would negatively impact your portfolios performance.

  1. Fees

Paying an advisory company a management charge for a good service is one thing. Even paying a slightly higher product charge can make sense when the tax benefits of that product work in line with your current situation and future plans. However, paying extortionate fund charges is never going to benefit any portfolio. A managed fund with a higher cost than an ETF is not necessarily automatically bad value, there are managed funds that are absolutely worth the money, but there are also many that are not.

How do I know if I am paying expensive fund charges?

Any charges will be clearly listed on the fund fact sheet that your advisor should give you before investing into each fund.

Every fund also has a unique code called an ISIN number. This can be found on many reports you have from the product provider. This code can be put into google and all the details of the fund should be available either on the Morningstar, FE or Trustnet websites. You will also see a rating for the funds and a comparison of their performance against a benchmark.

Look out in particular for funds that have an entry charge or a charge on exit, these can be as much as 4-5%.

2. Poor fund managers

It is not uncommon for advisory companies to consistently use particular, less well known fund managers for their client’s portfolios. Usually, this will be because the fund manager has invested time building a relationship with the advisory company, developed tools to make the advisors job easier by using them, or incentivised the advisors by offering earning opportunities. This doesn’t necessarily translate to them being the best fund managers, just the best at getting more business.

Given the level of transparency on funds, naturally, the best performing ones are easily identified and will attract investment without having to fight for it. On occasion, lesser known fund managers have fantastic performance, maintained over the long run. But generally speaking, sticking with the industry leaders such as Blackrock and Vanguard, is a safer bet.

In particular, be extra weary of any companies who are using their own funds. Whilst a number of large companies in the U.K do this, they do so under the watchful eye of the FCA. As for the others, you can be certain they do not have the level of skill or experience that the biggest investment managers do.

With this in mind, it would seem apparent that an advisory company that chooses to make their own funds, rather than put their clients into the market leading, more experienced and sophisticated funds already available, does so purely to further their own benefits.

3. Neglect

What was once good, may not be good any more, and what is good now, may not be good in the future. Portfolios should be looked at regularly to make sure they are up-to-date, in line with your current risk profile and anything that requires changing, is changed. If you are not receiving this level of service, what are you paying for?

Fixing these 3 things requires no drastic changes and very little effort. Get in touch with us if you would like a second opinion on any existing investments you have.

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Andrew Hipshon

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