Is the default fund so bad?

Thrugelmir

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 cannot control performance. However you can control the amount you save. Focus on that initially. Once you've hit your primary objective then that's the time to consider what amount of capital you can afford to risk. Markets are both unpredictable and savage in their nature. Nor concern yourself with macro events such as Brexit. Leave that to the fund managers. Who will position the portfolio accordingly. 

notyourrealname

Deleted_User said:

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. 

That's handy, bookmarked that, thanks.
Had a play with some numbers, based on current rates of contribution, over a 20 year period, if the higher charging fund gave a return of 5% and the lower charging fund gave a return of 3.5% then I would still be up over £50k after the fees were taken into account. Crystal ball not available, but surely that would be a reasonable expectation that the higher risk, higher cost fund would perform better?
I appreciate you said over 40 years, but the numbers don't work over that long as I doubt I would be continuing with the same level of contributions once retired.
WRT the fees in general, I'm stuck with Aegon in order to get my employer's contribution AFAIK, but happy to be wrong on that.

Albermarle

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?

Most large UK companies have a global spread, so Brexit will have little effect one way or the other , although it may have more effect on medium, smaller companies that are more UK focused.

These traditional pension companies/funds tend to have high UK weightings , partly because they always have, and partly that many customers are/were nervous about too much in foreign investments . Many posters on this site prefer more global funds where UK may only be 5%, and for sure these global funds have performed better in recent times , than more UK heavy funds . Of course that may not continue and UK could now be undervalued and US overvalued . Personally I hedge my bets and have a % somewhere in the middle but no particular science behind that and investing is as much about opinion than anything else.

[Deleted User]

notyourrealname said:

Deleted_User said:

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. 

That's handy, bookmarked that, thanks.
Had a play with some numbers, based on current rates of contribution, over a 20 year period, if the higher charging fund gave a return of 5% and the lower charging fund gave a return of 3.5% then I would still be up over £50k after the fees were taken into account. Crystal ball not available, but surely that would be a reasonable expectation that the higher risk, higher cost fund would perform better?
I appreciate you said over 40 years, but the numbers don't work over that long as I doubt I would be continuing with the same level of contributions once retired.
WRT the fees in general, I'm stuck with Aegon in order to get my employer's contribution AFAIK, but happy to be wrong on that.

The expensive “high growth” fund has 80% equities.  The cheap fund has 70%. If you assume real return on equities of 3% and on bonds 1%, the delta in expected return is something like 0.2%.  That does not offset the extra charges. And in general you should be comparing risk-adjusted returns. 

“ Crystal ball not available, but surely that would be a reasonable expectation that the higher risk, higher cost fund would perform better?” Not at all. As a rule of thumb, higher cost funds perform worse. 

“appreciate you said over 40 years, but the numbers don't work over that long as I doubt I would be continuing with the same level of contributions once retired.“

Sure. But you will still be invested. Until you die. And will be incurring charges, whether you contribute or withdraw. 

notyourrealname

Deleted_User said:

The expensive “high growth” fund has 80% equities.  The cheap fund has 70%. If you assume real return on equities of 3% and on bonds 1%, the delta in expected return is something like 0.2%.  That does not offset the extra charges. And in general you should be comparing risk-adjusted returns. 

...

OK, that's going beyond my noddy level "shove some numbers in Excel and see what it looks like". Probably why I work in IT not finance. I suppose I'm assuming that the overall performance of the "high growth" fund would be higher overall, not just because it has a higher percentage of equities but also that those equities provided higher returns. Is that not a valid assumption?

Sure. But you will still be invested. Until you die. And will be incurring charges, whether you contribute or withdraw. 

True, but once I stop working, I would likely move it to a platform with lower charges.

Thanks to all, I think the responses confirm I have no idea what I'm doing and will stick with the default fund as the level of performance seems decent and it's cheap.

[Deleted User]

notyourrealname said:

Deleted_User said:

The expensive “high growth” fund has 80% equities.  The cheap fund has 70%. If you assume real return on equities of 3% and on bonds 1%, the delta in expected return is something like 0.2%.  That does not offset the extra charges. And in general you should be comparing risk-adjusted returns. 

...

OK, that's going beyond my noddy level "shove some numbers in Excel and see what it looks like". Probably why I work in IT not finance. I suppose I'm assuming that the overall performance of the "high growth" fund would be higher overall, not just because it has a higher percentage of equities but also that those equities provided higher returns. Is that not a valid assumption?

Sure. But you will still be invested. Until you die. And will be incurring charges, whether you contribute or withdraw. 

True, but once I stop working, I would likely move it to a platform with lower charges.

Thanks to all, I think the responses confirm I have no idea what I'm doing and will stick with the default fund as the level of performance seems decent and it's cheap.

“Growth fund” does not mean that this is the fund which will outperform. “Growth” stocks are the opposite of “value” stocks. Historically value stocks outperformed growth stocks, although it hasn’t been the case over the last 10 years. The future... Who knows? Not me. Having said this, right now the valuation discrepancy between growth and value stocks is high by historic standards which could be a bad omen for the former. 

Overall, I think you are making the right decision. In the future, when you have time, read a few books and you’ll pick up all you need to know.  No urgency.  I am not in the financial industry either. I am a nuclear physicist but once upon a time I needed to make investment decisions so I educated myself.  At some point you will also need to understand a bit more about risks and asset classes but given the few options you have, I wouldn’t worry. 

Thrugelmir

notyourrealname said:

Deleted_User said:

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. 

Crystal ball not available, but surely that would be a reasonable expectation that the higher risk, higher cost fund would perform better?

Higher risk equates to greater volatility. Greater returns possibly, also the likelihood of greater falls at times. Higher costs will relate to the management of the underlying investments. Far easier to manage a fund containing US and UK companies, than companies in emerging markets. There's a gulf in the quality of corporate governance for example. 

Albermarle

True, but once I stop working, I would likely move it to a platform with lower charges

You have not said what the platform charge is , so there could be cheaper available. However you will find it impossible to find a fund charge as low as 0.05% .

Normally a low cost multi asset fund will cost between 0.17% and 0.25% .

notyourrealname

Deleted_User said:

“Growth fund” does not mean that this is the fund which will outperform. “Growth” stocks are the opposite of “value” stocks. Historically value stocks outperformed growth stocks, although it hasn’t been the case over the last 10 years. The future... Who knows? Not me. Having said this, right now the valuation discrepancy between growth and value stocks is high by historic standards which could be a bad omen for the former. 

Overall, I think you are making the right decision. In the future, when you have time, read a few books and you’ll pick up all you need to know.  No urgency.  I am not in the financial industry either. I am a nuclear physicist but once upon a time I needed to make investment decisions so I educated myself.  At some point you will also need to understand a bit more about risks and asset classes but given the few options you have, I wouldn’t worry. 

I'd like to have a basic knowledge of what it's all about, at least more than I do at the moment. Are there books that you would recommend?

notyourrealname

Albermarle said:

True, but once I stop working, I would likely move it to a platform with lower charges

You have not said what the platform charge is , so there could be cheaper available. However you will find it impossible to find a fund charge as low as 0.05% .

Normally a low cost multi asset fund will cost between 0.17% and 0.25% .

The platform charge is 0.29%. Actually I have no idea if that's high or low but I suppose what I meant was that I could move it to a platform with more flexibility and potentially lower charging funds.