Is the default fund so bad?

notyourrealname

I'm in my employer's DC scheme which is run by Aegon. I'm currently in the default fund and trying to work out if another fund would be better (as if often suggested when I read about increasing pension growth). I am 40 and would quite like to retire at around 60, but may just go part time from late 50s and therefore not actually need to draw pension until a bit later, dependent on what living costs are at the time and whether or not my wife has also retired.
I have been looking at fund info on the retireready site but I'm not sure if I'm really comparing the right information and would appreciate guidance.
Current fund is called "Growth Tracker" which is about 70% equities and the rest bonds and cash. Fund charge is 0.05%. Only started in Feb 16. Last 4 yrs performance numbers are 10%, 8%, 7.1%, -2.3%. It has an Average risk rating.
Then comparing that with a "Growth Core" portfolio which is about 80% equities. Charge is 0.26%. Started in Sept 15. Last 5 yrs performance is 22%, 11.2%, 5.8%, 5.3%, -3%. Above average risk rating. Performance appears to be worse in the last 3 years and the charge is 5 times as much as the Default fund.
Looking at the "Growth select" portfolio, similar profile. Charge is 0.79%. Last 5 years performance is -1.4%, 21%, 3%, 3%, -8.4%. Above average risk. Performance seems even worse and fees are 15 times higher.
I realise that I am only looking at a few funds here (I have looked at more on the Aegon site and it's the same story) and am sure I am oversimplifying but I have very little knowledge of investments so I'm not planning on choosing individual funds and so on. The choice is either the default fund, or one of the pre-packaged portfolios and looking at the numbers, it looks like the default fund is performing better but am I missing something? It appears that none of the pre-packaged funds have data further back than 5 years which is also making it more difficult to get a decent comparison.

MallyGirl

generally the default is a medium risk fund - maybe around 60% equities. As you can see, higher equity percentages can lead to much more volatility. 5 years is too short a period to be looking at really. Both of the higher equity ones have positive figures in the 20s. If you were starting out then there is a strong argument to go higher or totally equities to put in some big growth early on which can be compounded in a calmer way later as you de-risk a bit - this obviously comes with the risk of much bigger drops but you have time on your hands to recover.

dunstonh

Is the default fund so bad?

Answering that bit in isolation, it can be.   Sometimes that default fund can be way off what you want or what it is desirable to have.

Current fund is called "Growth Tracker" which is about 70% equities and the rest bonds and cash.

That is at the higher end of a typical average UK consumer risk profile for long term investments. 

It has an Average risk rating.

Without time weighting, 70% equities would be closer to medium/high than average but that always depends on the scale being used.  Adviser benchmark with cash as the starting point.  Investment firms often dont start at cash but start their scale at a higher point.

Then comparing that with a "Growth Core" portfolio which is about 80% equities. Charge is 0.26%. Started in Sept 15. Last 5 yrs performance is 22%, 11.2%, 5.8%, 5.3%, -3%. Above average risk rating. Performance appears to be worse in the last 3 years and the charge is 5 times as much as the Default fund.

Performance would be worse if you are just looking at the last 3 years. 2018 was a negative year. 2019 a growth year and 2020 is broadly break even YTD (those with a higher UK equity content will likely be negative YTD - those with a global spread likely just positive).    In effect, you have a good year, negative year and nothing year in that three.   So, performance on most funds in the last 3 years would be broadly similar and basic funds with higher risk may well be worse in performance in such a s short period.

As time goes on, you would expect the higher equity funds to be the better performers.  An economic cycle is around 10+ years.  If you take any 3 year period in isolation, you could have the bad part of the cycle, the nothing part of the boom part.    Hence why no-one should be looking at just 3 years.

notyourrealname

dunstonh said:

Is the default fund so bad?

Answering that bit in isolation, it can be.   Sometimes that default fund can be way off what you want or what it is desirable to have.

Current fund is called "Growth Tracker" which is about 70% equities and the rest bonds and cash.

That is at the higher end of a typical average UK consumer risk profile for long term investments. 

It has an Average risk rating.

Without time weighting, 70% equities would be closer to medium/high than average but that always depends on the scale being used.  Adviser benchmark with cash as the starting point.  Investment firms often dont start at cash but start their scale at a higher point.

Then comparing that with a "Growth Core" portfolio which is about 80% equities. Charge is 0.26%. Started in Sept 15. Last 5 yrs performance is 22%, 11.2%, 5.8%, 5.3%, -3%. Above average risk rating. Performance appears to be worse in the last 3 years and the charge is 5 times as much as the Default fund.

Performance would be worse if you are just looking at the last 3 years. 2018 was a negative year. 2019 a growth year and 2020 is broadly break even YTD (those with a higher UK equity content will likely be negative YTD - those with a global spread likely just positive).    In effect, you have a good year, negative year and nothing year in that three.   So, performance on most funds in the last 3 years would be broadly similar and basic funds with higher risk may well be worse in performance in such a s short period.

As time goes on, you would expect the higher equity funds to be the better performers.  An economic cycle is around 10+ years.  If you take any 3 year period in isolation, you could have the bad part of the cycle, the nothing part of the boom part.    Hence why no-one should be looking at just 3 years.

Thanks, yes, I suspected that I didn't really have enough data to compare properly and as Mallygirl also points out, the "good" years for the growth funds are much better than the Default fund. Unfortunately, the factsheets only seem to go back 5 years.
Is there older performance data available elsewhere? It's not clear if these other "Growth" funds have been running longer than that though.
How do I work out the impact of fees? Is it just a simple calculation of that percentage (e.g 0.79%) on the total fund value and the amount of growth?

notyourrealname

MallyGirl said:

[snip]....... you have time on your hands to recover.

I suppose this is the million dollar question that can't be answered without a crystal ball but would you say, generally speaking, 20 years is long enough to ride out a few dips?

[Deleted User]

Of the 3 options, the default fund is what I would have chosen. 

Not sure which indices its tracking though.  Also, for a 40 year old, an all equity portfolio might be more appropriate. Assume they didnt give you a cheap option that’s 100% stocks? 

notyourrealname

Deleted_User said:

Of the 3 options, the default fund is what I would have chosen. 

Not sure which indices its tracking though.  Also, for a 40 year old, an all equity portfolio might be more appropriate. Assume they didnt give you a cheap option that’s 100% stocks? 

When you say indices, is that the holdings? Sorry for the numpty question!
They list out "Top Holdings" that are things like UK INDEX TRACKER PN, UK EQUITY SELECT PORTFOLIO PN, OVERSEAS EQ TRACKER PN.
There is one described as "Adventurous" (that is so not me) that states it is between 85-100% depending on fund manager discretion. Fund charge is 0.21%.
Seems like all the Aegon ones have at least 30-40% UK equities. Is that high? Will that make them potentially more impacted by a no deal Brexit?

AlanP_2

notyourrealname said:

How do I work out the impact of fees? Is it just a simple calculation of that percentage (e.g 0.79%) on the total fund value and the amount of growth?

Funds show returns after fees so they are built in to the returns you are seeing on the factsheets.

AlanP_2

notyourrealname said:

Deleted_User said:

Of the 3 options, the default fund is what I would have chosen. 

Not sure which indices its tracking though.  Also, for a 40 year old, an all equity portfolio might be more appropriate. Assume they didnt give you a cheap option that’s 100% stocks? 

When you say indices, is that the holdings? Sorry for the numpty question!
They list out "Top Holdings" that are things like UK INDEX TRACKER PN, UK EQUITY SELECT PORTFOLIO PN, OVERSEAS EQ TRACKER PN.
There is one described as "Adventurous" (that is so not me) that states it is between 85-100% depending on fund manager discretion. Fund charge is 0.21%.
Seems like all the Aegon ones have at least 30-40% UK equities. Is that high? Will that make them potentially more impacted by a no deal Brexit?

The indices, or index will be what the INDEX TRACKER is tracking e.g. FTSE 100, All Share, All World etc. etc.

The factsheets will probabaly tell you what index they are using, or Trustnest / Morningstar.

notyourrealname

AlanP_2 said:

notyourrealname said:

How do I work out the impact of fees? Is it just a simple calculation of that percentage (e.g 0.79%) on the total fund value and the amount of growth?

Funds show returns after fees so they are built in to the returns you are seeing on the factsheets.

OK, that's good to know, although I meant more the impact on my pot. I'm probably overthinking that as my pot at the moment is about 75k, so not exactly massive! Comparing the default (0.05%) with a fund that has a charge of 0.2% means £112 extra in fees on the whole pot. So, the higher risk fund wouldn't have to return much more than the default to be ahead.

[Deleted User]

notyourrealname said:

AlanP_2 said:

notyourrealname said:

How do I work out the impact of fees? Is it just a simple calculation of that percentage (e.g 0.79%) on the total fund value and the amount of growth?

Funds show returns after fees so they are built in to the returns you are seeing on the factsheets.

OK, that's good to know, although I meant more the impact on my pot. I'm probably overthinking that as my pot at the moment is about 75k, so not exactly massive! Comparing the default (0.05%) with a fund that has a charge of 0.2% means £112 extra in fees on the whole pot. So, the higher risk fund wouldn't have to return much more than the default to be ahead.

You can  estimate the impact of charges here: http://www.candidmoney.com/calculators/investment-charges-impact-calculator

0.79% doesn’t sound like much but it is applied to your money again and again and again over many years. Assume you live till 80, look at the impact if you invest over 40 years. It will be large.  

Personally, I prefer charges under 0.1%. Anything under 0.2% is still ok. Anything over 0.5% is not. 1% is completely unacceptable in this day and age.