Average savings returns comparisons

Telegraph_Sam

bowlhead99 wrote: »

What? You were desperate to avoid loss of capital. Why would you have taken investment risk in gilts which can lose capital or equities that can lose capital, over a cash fund where the only exposure is fees?
.

Given the imminence of drawing on the fund I wouldn't!! And I didn't!

marathonic

Telegraph_Sam wrote: »

We are obviously never going to agree on this.

Highly unlikely but good luck.

For what it's worth, I was in a cash fund this year from May 20th until June 13th in my pension fund.

The primary reason for me being in it was that I wanted to have a pretty good idea of the transfer value when moving my pension from one provider to another.

As luck would have it, I missed out on a drop of more than 6% in equity markets. This is the purpose of cash funds and I was lucky to take advantage of their benefits during the only period I've ever been in a cash fund in my pension (and yes, the nominal value would have fallen ever so slightly over this period).

bowlhead99

I'm not sure I follow. To paraphrase:

-Me:
"You chose to go into a cash fund for a few years which could provide no investment returns and no capital loss other than management fees. If you had known what it was, would you have still gone for that, or would you have gone for equities or gilts which could lose a lot more?"

You:
"Faced with the either-or choice, I would obviously have gone for gilts"

Me:
"I am surprised. Because, you didn't want investment risk, and could have lost more money by going with gilts"

You:
"Correct, I wouldn't and didn't take that choice".

So it seems to me you still think you took the right choice out of the options they had.

You just wish that the fund which best matched your needs, performed better.

This is not a case of "if to appreciate the subtleties you have to be a financial expert", this is case of someone being disappointed with investment returns, after fees, provided by the fund they chose. Understandable when equities, bonds, gilts would all have delivered a decent positive return over the period before and presumably after fees.

Having made the choice, you didn't look at the fund performance or check the results of that choice for over three years? Standard advice on this "money saving" site and others is to monitor the interest rates you are actually achieving - for example to ensure it is in line with the rate they say you will get, or to ensure the bonus rate hasn't expired dropping you from a 2% special introductory offer to 0.1% non-bonus rate.

So to ignore it for three years you must have been confident it was giving the right results - even though they wouldn't have told you what rate you were going to get because it was unknown and driven by market forces. More realistically, it was the only choice from the provider without investment risk, and you weren't going to change provider, so there was no practical point checking it. But it does seem a bit off to then complain a long time later that it wasn't what you wanted.

Telegraph_Sam wrote: »

I have yet to calculate what the combined "market interest rate" was over the 3 years - obviously higher than at present

The bank base rate is 0.5%, and had been for a year before you moved into cash, and still is. The actual inter-bank offered rates bobble around a bit from day to day. As a long term average, LIBOR for three month deposits is sometimes 0.1 to 0.2% higher than bank base rate, but that has not really been the case over the last few years. At some points it's been quite a bit better, others (like in the last half a year or so) it's been quite a bit lower than that. And in reality a cash deposit or money market fund, invested by a pension fund for liquidity above all else, might get a lower return than 3-month LIBOR because some of it is going to have to be on overnight or fortnight or one month maturity to meet the needs of its investors.

If you are looking for comparable information with which to confront your insurance company, you can get daily market rates from http://www.bbalibor.com/rates. It is still valid to ask them the question why your net return was negative 1.3% a year against a base rate of 0.5%. It isn't as large a gulf as you are trying to make out, but you would at least be presenting data which is less likely to be dismissed out of hand.

- but if against this they can't at least preserve the nominal value of my capital on deposit then I wonder what I am paying them for.

I expect in terms of underlying invested cash they did at least preserve the nominal value of your capital on deposit within the fund.

Unfortunately

- a fund costs money to administer and do the accounting and audit and produce reports, and will also pay an advisor to make decisions on where to put the money to avoid counterparty risk and maintain liquidity without sacrificing too much return.

- then on top of the costs of the individual fund in which you're invested, there will be other costs of the insurance company providing the wrapper over the top, having an office and a sales team and customer service and taking peoples money and deciding what funds they should offer and meeting regulatory compliance and solvency requirements and providing general administration, accounting and reporting etc. And also taking a profit margin, like the fund manager, because that is why any company exists.

So, wonder no longer: that is what you are paying them for.

Telegraph_Sam

Again I don't want to flog these arguments exponentially. The main point is to distinguish - from the average policyholder Joe Soap's perspective - between 1. a "deposit" (which may or may not be the same as a "cash") fund, and 2. any other fund offering a combination of investment performance and risks in some form or other.

I don't believe it is the least bit unreasonable for the average semi-savvy policyholder to move his savings into a deposit fund and expect at the very least to maintain the net nominal value, without having to go through all the ponderings and investigations that going by the book would be advisable for any of the more adventurous alternatives [I did speak to their adviser]. I think the bulk of your comments apply to the latter.

I doubt very much whether much or any management time and expertise went into keeping my savings on deposit - and if this was the case then the input was certainly not balanced by the output (and vice verse if you follow). If there was a foreseeable prospect of fees outstripping performance for a cautious and by definition predictable fund of this nature, then this should have been made clear from the outset without the need for the Joe Soaps of this world to conduct 3rd degree investigations before "taking the leap".

Bearing in mind that my original point was to have a yardstick for comparison but not to moan about my deposit fund not having matched the performance of the raciest of the instant access internet funds over the past 3 years!

Bigmoney2

Telegraph_Sam wrote: »

I don't want to go on belabouring the point out of consideration for other readers. If I entrust my savings to a financial institution to provide for imminent retirement, switch this on their advice to a deposit fund - only to see it worth less now in nominal (let alone real!) terms than 3 years ago, then I feel that I have been not well served. They could at least have stuck it under the corporate mattress. And to boot if they haven't otherwise got the financial expertise to recoup their management expenses, then I can see someone by the name of McKinsey being rapidly summoned over the horizon.
[needless to say, if there had ever been the prospect of achieving anything remotely approaching 40%, or even 10 - 20% p.a., I wouldn't now be upset about actually losing money "on deposit"]
Apologies if it looks like I am repeating myself ..

I think what people don't always understand is the difference between savings and investments, especially as they are often used in the same sentence and so sound like one thing.

As the saying goes

'savings are safe, investments carry some level of risk'

The risk being that the original amount of money can go down.

With cash, by which I mean money in savings accounts, the original money will still be there, but will increase by little, (low interest rates). The risk with cash is that it doesn't keep up with inflation so what you can buy with it may be reduced over time.

With investments e.g. shares, there is a risk that the original money may go down, but it could go up and by more than inflation.

So you balance out low returns and low/no risk versus possible higher return but with a risk you may loose money.

Any form of investment will likely also have fees attached, unlike a savings account, although some do have fees.

Telegraph_Sam

Accepted without argument.

Where however there seems to be grounds for discussion is how to classify and interpret a "deposit" fund, without getting bogged down in semantics, and the reasonable expectations that Mr Average could have in terms of preserving his savings (net, nominal) within it.

jimjames

Telegraph_Sam wrote: »

Accepted without argument.

Where however there seems to be grounds for discussion is how to classify and interpret a "deposit" fund, without getting bogged down in semantics, and the reasonable expectations that Mr Average could have in terms of preserving his savings (net, nominal) within it.

If the base rate was 5% and you'd got a return of 4% after 1% charges you would not be complaining.

Unfortunately the base rate is not 5% but 0.5% so 1% charges will reduce value as has been the situation for the last 4 years. As I understand it some bond capital values dropped by 7% in the last month so you are lucky you weren't in them instead.

Did you ask the insurance company what the rate of return you would get was? Did you check the charges if they weren't outlined?

jem16

Telegraph_Sam wrote: »

Where however there seems to be grounds for discussion is how to classify and interpret a "deposit" fund, without getting bogged down in semantics, and the reasonable expectations that Mr Average could have in terms of preserving his savings (net, nominal) within it.

Were you given anything to actually read or was it just all verbal? Were any figures actually given to you?

bowlhead99

Telegraph_Sam wrote: »

Where however there seems to be grounds for discussion is how to classify and interpret a "deposit" fund, without getting bogged down in semantics

Understanding terminology is one of the few things that conspires to separate knowledgeable investors from newbie investors, because investment concepts themselves are quite simple once you 'get' them.

It's a problem in the financial services industry generally - if you'll indulge me on an off-topic ramble. What are "bonds":

- Co-op Bank, through their Britannia brand, issue "Fixed Rate Bonds"- a one or two-year savings scheme with a fixed term which can't be cashed in early. It's a saving product.
- Co-op Insurance (CIS), through affiliation with Aviva, allowed you to invest in Investment Bonds, which contain a small amount of life insurance and are a wrapper for a whole variety of investments across a spectrum of risk
- Co-op Bank plc (which has plc in the name but is not a listed company) issued Perpetual Subordinated Bonds which represent loan notes for money lent to the business at one time, paying a fixed rate of interest (while they can afford it). The bonds can be traded on the stock market, and bought and sold between investors for wildly differing values from time to time. If the company goes bust you get nothing back, and if it looks like it might be going bust you might lose a slice or have the terms and conditions changed.

The terminology for some very comparable loans made to other companies, in small enough chunks that the man on the street could afford them rather than needing £100,000 minimums, is "Retail Bonds" because they can be acquired by retail customers rather than industry professionals, even though the business is not a retail business. The ones with similar characteristics (but perhaps different levels of risk) that typically only institutions can afford, are known generically as 'bonds' rather than retail bonds, but you can of course access these too, through big enough investment funds. Perhaps held in an investment bond...?

Oh and our government bonds are called gilts because they're "gilt edged", meaning backed with gold, except of course these days they're not; and also they have a solid reputation as the absolute safest investment you can get, except they are traded on markets and so might go down in value, and you might lose money. I digress...:)

So when someone says they heard that Co-op bondholders are going to lose money and they have some Co-op bonds, what does it mean for them - it means nothing until you know what it is they're actually on about. The industry does not make it easy to keep up.

So, back on topic this language barrier is a problem across the financial services industry because unless you know exactly what the other person means through the time and place and context of the situation, or are able to guess whether his particular level of investment knowledge means he's using a layman term to mean something very specific while getting the context all wrong, you can't have a proper discussion with anyone about investments without checking and doublechecking what they mean when they say something.

So on that basis, having a discussion without getting bogged down in semantics is a non-starter. We have to discuss what the words mean and ask the questions 'what do you mean by that; why don't you realise that in this context xyz can't possibly be true and the word means something else?' The purpose is not to patronize or insult the person you're discussing with, or as you put it, flog the arguments exponentially without getting anywhere, but to establish what the heck is going on and educate them if need be.

In your case, you are talking to a customer services person about the investments held inside your retirement portfolio. You want to minimise risk and get out of equities or bonds or whatever which might fluctuate in value by a considerable percentage. He suggests one of the funds available is a fund he calls the deposit fund. The manager of the fund will deposit the cash assets of the fund with a variety of creditworthy institutions. Or perhaps it is not physically deposited but it's all done on paper with the aforesaid institutions. Either way, it's a money market investment rather than a bond or equity investment so it's the safest thing they can give you in terms of percentage swings of asset value.

Your investment is not locked up for any period and you can get it back whenever you want - at least you can get it back out of the deposit fund to put in something else, you can't necessarily get it back into your hands, depending on your arrangement with the insurer. At this point, you know all you need to know to decide if you want that or you want equities or bonds instead. You really just want to put your money 'on hold' in their safest option. So you are sold.

He might not have explicitly told you that a fee is charged by the manager of the funds, nor perhaps that your overall charges (if any) for maintaining the wrapper will continue, as he can presume you know how investing works having been in his other funds. He also won't tell you what gross or net returns the fund will deliver, because that's an unknown, as nobody knows what will happen to rates over future years.

He might presume that you know that base rates and inter-bank deposit rates are 0.5% which they have been for a year and it's mentioned on the TV quite often - so you're very unlikely to get more than [that figure less fees]. And the absolute return is not really relevant anyway as the goal is really just "not to take investment risk". If you ask, he might give you a range of returns achieved historically.

So, from the customer service/sales guy's perspective, he's outlined sufficient facts for you to make a decision, you seem like a smart guy or girl, and if you have any questions you'll ask. His goal is not to put you off investing, or put you onto investing in something inappropriate, it is just to be available on the phone, send you the literature, and help you stay a happy customer. He thinks he has done this.

Now your interpretation of a deposit fund, is a personal deposit account with a bank where you get your own account number with the bank, you get a variable (hopefully positive) interest rate and no charges. With the best-buy and promotional accounts with most retail banks you can get a return above LIBOR. With the worst-buy accounts with the same banks you get a return well below LIBOR - I have several unused accounts which are out of their bonus periods and are paying 0.1% or less if I bothered to use them.

The average of every account in existence in 2012, for example, was absolutely nothing like the 2.80% instant access ISA offered by Nationwide which appears in the 'average rate' table on that link from Innovate above, though of course that only came from a random quick google search so it's not warranted to be any way representative of the average product on the market available to a specific type of customer.

So lets say rates are 0.5% on average which is close to LIBOR and bang on the base rate. With an insurance company that does not specifically tell you you will get a promotional rate of any sort, I think it's unfair to expect more. Then you look at what this would translate to as net returns after fees. The distinction between you having a deposit account with a high street bank eager for custom, and you joining a collective investment scheme where a fund manager runs a multi-million pound fund with a strategy based on placing cash overnight with institutions and charging a fee for juggling the money around and finding the ones that can pay some sort of return without going bust, is a fundamental one and is not just semantics. It is a completely different product.

How do we get Joe Schmoe to recognise the distinction in a one minute conversation on the phone with a sales advisor, if he has no investment experience? With difficulty. All you can do is send the paperwork and hope he reads it and understands it and checks his account balance every year or so to see if it's doing what he expects. Ultimately if he wants zero investment risk and is somewhat tied into using your products, he probably in the right product, so he has not really been mis-sold, and you can sleep at night comfortably, because you genuinely believe he gets it, or you think 'caveat emptor' and know he will not come to much harm anyway.

I realise I'm taking up valuable screen space here so just to round off - a couple of your comments such as:

...the reasonable expectations that Mr Average could have in terms of preserving his savings (net, nominal) within it.

...the average semi-savvy policyholder to move his savings into a deposit fund and expect at the very least to maintain the net nominal value

You are talking in several places about needing to preserve net nominal value, which I agree is a less ambitious goal than preserving real-terms value. But the issue really, is that investment over a lifetime, and whether approaching retirement or not, is always about trying to grow or maintain your money in real terms. Nominal rates are almost an irrelevance.

If base rates and inflation/deflation are both negative five percent, you will find it impossible to get a positive nominal return from your investment. If we have hyperinflation at +50% and bank base rates are 25%, you will get a great nominal return but it will be even more useless to you. The nominal stuff means nothing.

So jimjames has explained it well. Looking at your slightly negative nominal return after charges, when base rates are 0.5% and inflation perhaps 3%, you are basically, 1-2% below base rates and probably 4% below inflation. If base rates were 5% and inflation 7.5%, and your result after fees was 3.5%, you would still be "1-2% below base rates and probably 4% below inflation".

But even though the effect on your retirement lifestyle is the exact same, in that alternative universe you would accept that the insurance company took away the investment risk of equities and bonds, and delivered you a positive nominal return, with which you are probably disappointed but not as psychologically scarred. No complaint needed

The reality is that this whole "succeeded/failed to get a positive nominal result" is a complete red herring criterion for judging an investment manager - it is completely out of his control and should not be used as a basis for complaint.

marathonic

Very good explanation. Or to put it in a single sentence, 'raising a complaint should be done in writing and is nothing more than a waste of the price of a stamp'.

I imagine there'll be some response that disagrees though. After all, Santander pay 3% on their current account deposits of up to £20k.