Fund returns compared to a term deposit

BY MARY HOLM

Q: Some time ago I wrote to you about an investment I took out.

I asked my accountant for his advice and he said I could be better off with a more stable investment where there were fewer people charging fees.

I wrote to you for your opinion. You suggested I should dump the accountant and stick with the managed fund.

Five years ago, I invested $20,800. I am interested to know what that would be worth now if it had been for a term investment with compounding interest.

As at February 15, the amount in the fund is $23,640.

Largely, I stand by what I said to you in April 2001, when you first wrote to me.

I say "largely" because in your first letter you didn't mention fees.

You said simply, "My accountant said I would have done just as well in a less risky investment like bank deposits."

Now, you've passed on his comments about fees, and also enclosed a copy of a tax statement for your investment.

You've been investing with one of New Zealand's biggest financial advisory firms, and your statement shows that you paid a "monitoring service fee" of $619 last year.

That's more than 2.6 per cent of the February value of your investment, "for the ongoing management of your investment portfolio".

I wonder what they did for that money? I suspect not a lot. And it makes me mad that they charge that much. By coincidence, your investment has grown at about the same rate as the fee, 2.6 per cent a year in the last five years.

If there had been no monitoring fee, it would have grown twice as fast, and reached a much more respectable $26,800.

No wonder your accountant implied you should get out. I would, too.

But I would suggest you move not to term deposits but to another managed share fund, such as an index fund listed on the Stock Exchange, and pay no monitoring fee.

The reasons I suggested you dump the accountant were:

* At that stage he was wrong. You had done quite a lot better in the fund than you would have in term deposits.

* More importantly, he seemed to imply that term deposits are a better long-term investment than a managed fund.

They are certainly more stable. But you need look only at the numbers in today's first letter to see how much better a typical share fund will perform than Government bonds, over the long term.

Term deposits perform similarly to Government bonds.

Things have changed since your first letter. The value of your managed fund investment has fallen considerably, from $27,175 to $23,640.

By now, your accountant would be right. In six-month term deposits, your $20,800 would have grown over five years to $24,850 if you are in the 39 per cent tax bracket, and $26,250 if you are in the 19.5 per cent bracket, according to Reserve Bank data.

Even so, your managed fund would have beaten term deposits without the high monitoring fee. Note, too, that the last few years have been unusually bad ones for share funds, especially international ones.

But, with an eye on the numbers in the first letter, I still urge you not to give up on them. In your first letter, you said your money originally grew 45 per cent in less than three years. Who knows? That might happen again. Getting out now would be buying high and selling low. Not a clever strategy.

I would, though, get out of your current high-fee investment.

And if that was the main point of your accountant's original comment, perhaps you should keep him on.


* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or email maryh@pl.net. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.