What are you REALLY earning from your investments? 

As an investor, your main concern may be about how the current volatile stock market is affecting your investments and the returns you receive. However, share prices aren’t all you must take into account — the charges you have to pay with investment funds also have an effect on your returns. 

Have you considered what it is costing you to have your investments managed and how this is eating into your returns?  What is your actual real return after inflation and after all costs? These are important questions to answer when establishing targets and managing expectations.

For example, assume an annual return of 10 percent, inflation (CPI) at six percent and the costs of managing your investment at two percent; then your net real return is two percent. This figure would be further reduced if you were drawing down any capital as in the case of a living annuity.

Andrew Ratcliffe of Private Client Holdings cautions that no one can expect to invest free of charge — there will always be costs involved.  It is important to know what those costs are otherwise it is impossible to make a properly informed choice.

"Investors must calculate their Total Expense Ratio (TER).  This is the amount of your assets that have been sacrificed as payment for the services rendered in the management of your investments and is expressed as a percentage of the daily average value of the portfolio and calculated over a set period — usually a financial year.

"The costs incurred in the management of a fund are deducted from the fund’s assets.  These costs include management fees (including performance fees), fixed operating costs such as custody and Trustee fees, audit fees, bank charges (other than those charged by an investor’s bank), Value Added Taxes and liquidity costs (like net negative interest charges), which is applicable in the unlikely event of a fund owing interest to a bank as a result of temporary liquidity pressure," says Ratcliffe.

Performance fees

Performance fees do not always sound much, but they can result in total charges of more than double the advertised Annual Management Charges.

For example, if a fund generates gains of 10 percent over its benchmark and has a 20 percent performance fee, the fund managers can claim an extra two percent fee.  If it has a 1.5 percent annual management fee which, with additional running costs, becomes a basic TER of 1.65 percent, the addition of the performance fee will bring total deductions to 3.65 percent.

Article continues on page two: what's not included in the TER and where to find an investment's TER...