Monthly Returns

Compounding isn’t always a positive

04 Sep 2017

Justin Urquhart Stewart, Co-founder and Head of Corporate Development

It’s well known within the investment industry that a sum invested at 7% over ten years should double in value – investment risks notwithstanding!

This is due to the power of compounding, which is an inherent part of investments (and savings when interest rates used to be meaningful). Here, you benefit from returns being generated on both the capital you originally put in and on any investment gains you have already received.

But compounding can also be detrimental. Unfortunately, fees and charges compound too as they eat away at your investment gains. So the higher the fees, the more money that’s being taken away each month which could have remained invested and build...

This is best shown by the graph below which is based on a £200,000 portfolio growing at 7% per annum over a 30 year period with impact of the different levels of fees highlighted.

PORTFOLIO VALUE AFTER FEES

Portfolio value after fees

As you can see the difference can become quite significant – a 3% decrease in fees could translate into £280,205 more. Of course the value of your investments can go down as well as up, and you could get back less than you originally invested. But if the investments do perform, as we would expect over the long term, then you’re looking at a sum of money that’s £40,000 greater than the average cost of a house in England[1].

But it is not just a case of finding a manager with the lowest cost. You should also look to see if your manager has a history of lowering their fund fees when the funds grow in size, not least as this shows they are genuinely committed to keeping their costs reasonable.

This can happen because – as you might expect – some of the costs of managing a fund are fixed. So as a fund grows, those costs can then be spread across more investors. Unfortunately, not every manager passes on these economies of scale; some simply sit on the extra profit.

But not here at 7IM. Here we look to pass on any of the cost savings that we can achieve. So when we launched our Asset Allocated Passive (AAP) funds, investors in the adventurous risk profile paid 0.83%. Now the same investor would be paying 0.68% – that’s a discount of over 20% that’s been returned to our clients.

We do this because we want our fees to be fair. So we also don’t charge clients a number of other fees that other wealth managers might – so, for example, you won’t get hit by any exit charges on our funds.

We think that it’s a privilege to manage our clients’ money – not a right. It’s why we have a common sense approach to fees. I only wish more managers would follow our lead.

Justin Urquhart Stewart
Co Founder and Head of Corporate Development

[1] Cost stands at £240,000 according to the Office for National Statistics as of 15 August 2017.

Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.

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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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