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Case study · Invest on your own
Kai chooses a fund
A case study for the end of "Invest on your own": two fund factsheets, an adviser's pitch, the cost over twenty years, a track record read properly, and a decision explained in plain words.
General education, not financial advice.
Kai, 30, has 10,000 to invest for at least twenty years and an emergency fund already in place. The funds, figures and adviser are made up, but they are typical of real factsheets. This is a worked example, not advice for your own situation. Work through the task with the lessons and calculators open, then compare your answers with the solution step by step.
Fund A: World Equity Index Fund
| Item | Figure |
|---|---|
| Aim | Track a global share index |
| Holdings | About 3,000 companies |
| Ongoing charge | 0.15% a year |
| Transaction costs | 0.02% a year |
| Entry charge | None |
Fund B: Global Opportunities Fund (actively managed)
| Item | Figure |
|---|---|
| Aim | Beat the same global index |
| Holdings | 45 companies |
| Ongoing charge | 0.95% a year |
| Transaction costs | 0.30% a year |
| Entry charge | 3% of what you invest |
Fund B's returns compared with the index, after its charges (yearly averages)
| Period | Fund B minus index |
|---|---|
| 1 year | +4.0% |
| 3 years | +1.2% |
| 5 years | −0.4% |
| 10 years | −0.9% |
The adviser's pitch for Fund B: "Five stars! Top-quartile over three years, and it beat the market by 4% last year. Our ongoing advice service is just 1% a year."
Your task
- What is each fund's all-in yearly cost, and what is the one-off cost?
- If the shares earn 6% a year before costs, roughly what does 10,000 become in each fund after twenty years? Include the adviser's fee for Fund B as pitched.
- Read Fund B's track record. What does it show, and what does the pitch leave out?
- Name the sales-pitch signs.
- In two or three sentences, which fund fits Kai's situation better, and why?
Solution
Try the task first, then open one step at a time and compare.
Step 1: the costs
- Fund A: 0.15% + 0.02% = 0.17% a year, no entry charge.
- Fund B: 0.95% + 0.30% = 1.25% a year, plus 3% taken at the start: 300 of Kai's 10,000.
- Fund B with the advice service: 1.25% + 1% = 2.25% a year, plus the 3% entry charge.
Step 2: twenty years in money
Growing at 6% a year less the yearly costs (the entry charge comes off first):
| Choice | After 20 years |
|---|---|
| No costs at all (for comparison) | about 32,100 |
| Fund A | about 31,100 |
| Fund B | about 24,500 |
| Fund B with advice | about 20,300 |
Fund A's costs take about 1,000 of the 32,100. Fund B with advice takes about 11,800, more than the 10,000 Kai started with. For Fund B to come out ahead, its manager would need to beat the index by more than its extra costs (about 1.1% a year) on average over twenty years, and also make back the 3% entry charge. (This assumes both funds earn the index's 6% before costs; the track record in step 3 is the evidence on that.)
Step 3: reading the track record
Fund B's best number is its shortest period. Over five and ten years, after its charges, it has trailed the index: by 0.4% and 0.9% a year. The pitch quotes the 1-year and 3-year figures and leaves out the longer ones.
Short records are mostly luck and timing, and funds that top the tables rarely stay there. A star rating scores past performance, so it looks backwards. Top-quartile means in the best quarter of similar funds, not ahead of the index: a fund can be top-quartile and still trail the index. A 45-company portfolio can also swing more, and will certainly differ more from the index. Ten years behind the index after charges suggests that whatever skill the manager has does not cover the costs.
Step 4: the sales-pitch signs
- Stars and "top-quartile" in place of the long-term comparison with the index.
- The best short period chosen ("last year").
- "Just 1%" for advice, without saying it compounds every year and costs thousands in money.
- Nothing on the entry charge, costs, or the five- and ten-year record.
Step 5: a decision Kai can explain
For a twenty-year investment, Fund A fits better: it holds the whole market, costs about a seventh as much a year, and has no entry charge. Fund B's longer record doesn't show the skill needed to cover its costs, and with the advice fee as pitched, its total costs would take more than the starting sum over twenty years. Advice can still be worth paying for, for planning or to avoid panic selling, but that is a separate question from this fund.
Check yourself
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