As part of my Wealthwoke journey, I’m on a mission to investigate, test and challenge conventional wisdom on issues relating to finances, purpose and lifestyle, so that we all can make better decisions when it comes to maximising the various dimensions of wealth.
This week I’m putting my Retirement Annuity (RA) under the microscope.
I started contributing to my RA about ten years ago. Like most people, I went to a financial advisor who showed me some performance tables from some of the large financial services companies whose names I recognised. Then I picked the one that had the coolest ads at the time.
I have barely thought about it since then.
Well, no more. This month I decided to put my current RA provider under the microscope using my trusted three-point evaluation criteria.
• Performance/Service levels
• Value for money
To assist with my evaluation, I decided to compare the performance of my current provider – Allan Gray – to that of a company that has made big waves over the last few years with its promise of lower fees – 10X Investments. I provided 10X with my latest statement and asked them for a comparative quote.
Here are the results of my evaluation.
My RA is invested in four funds via the Allan Gray LISP platform. These include the Allan Gray Balanced Fund, Coronation Balanced Fund Plus, Foord Balanced Fund and Investec Opportunity Fund.
It’s important not to base a decision on which asset manager to invest with solely on past performance. However, it is useful to compare returns over various time periods.
Here are the gross returns (before fees) generated by my current funds vs the 10X High Equity Fund.
Fund 1 year to 30 April 2019 3 years to 30 April 2019 5 years to 30 April 2019 7 years to 30 April 2019 10 years to 30 April 2019
|Fund||1 year to 30 April 2019||3 years to 30 April 2019||5 years to 30 April 2019||7 years to 30 April 2019||10 years to 30 April 2019|
|10X High Equity Fund||5.10%||5.90%||7.5%||11.30%||13.2%|
|Allan Gray Balanced Fund||4.05%||5.25%||7.41%||10.79%||12.0%|
|Coronation Balanced Fund Plus||3.58%||4.86%||6.44%||10.34%||12.61%|
|Foord Balanced Fund||4.6%||3.12%||5.12%||8.96%||11.7%|
|Investec Opportunity Fund||9.2%||5.1%||7.52%||10.05%||12.35%|
It can be argued that comparing these funds is not strictly comparing apples with apples. The 10X High Equity Fund (as its name implies) has a fixed allocation to equities of 75%, while the other balanced funds can vary their allocation to the various asset classes. They are rarely at the full 75% equity allocation, which probably explains some of the performance differential compared to the 10X fund. Nevertheless, this is their offerings when it comes to Regulation 28 compliant high equity funds, so I think it’s a fair comparison.
There is not a huge amount in it when comparing gross performance, but it’s still a little surprising (and disconcerting) to see a passively managed fund outperform some of South Africa’s most revered asset managers over virtually all time periods going back 10 years.
Performance score: 7/10
Value for money
At the end of the day, when it comes to investing, what matters is the net return, in other words, the return after deducting all fees.
Its therefore really important to compare the fees being charged by the various RA providers.
|Retirement Annuity fee||Current Provider – Allan Gray||10X Investments|
|Portfolio fees||1.35%||1.13% (0.96%)*|
|Total asset based fees||2.03%||0.96%|
It’s actually not that easy to compare fees due the different fee structures and the fact that my RA is currently invested in a number of funds through the Allan Gray LISP platform. Nevertheless, I have given it a go.
While Allan Gray charges me a 0.39% admin fee, 10X does not charge anything. In fairness, that 0.39% admin fee includes access to the Allan Gray LISP platform, where I can choose from any number of funds to invest in.
The admin fee for my assets invested in the Allan Gray Balanced Fund is 0.23%. However, the admin fee for my assets invested in the other asset manager funds through the Allan Gray platform is 0.49%. As my Retirement Annuity assets are split between the Allan Gray Balanced Fund and three other non-Allan Gray funds, the overall portfolio fee is 0.39%.
So is the admin fee worth it in order to get access to a range of other funds? Based on the performance of my portfolio to date and the relatively homogenous nature of these funds, I don’t really think so. But it’s really up to you to decide.
The portfolio (or asset management) fees currently charged to me on my funds are as follows (Incl VAT):
Allan Gray Balanced Fund: 1.57%.
Coronation Balanced Fund Plus: 1.28%
Foord Balanced Fund: 0.88%
Investec Opportunity Fund: 1.35%
The fees include bonus or discounts on fees based on performance (except for Coronation, which does not have a bonus clause).
All combined, my overall portfolio fee is currently 1.35%.
Unlike most of the above funds, the 10X portfolio fees do not have a performance fee clause. In addition, they reduce based on the value of your assets in the fund.
Based on my current assets, the current fee quoted by 10X is 1.13% (incl VAT and all transaction costs). However, because the fee reduces as my asset size grows over time, the projected average fee charged by 10X over the 22 year period would be 0.96%*.
Finally, unlike Allan Gray, 10X does not allow for an advisor. I’m still not sure how I feel about that, but I understand the 10X thinking in that they only have one offering, so paying an advisor seems a little unecessary.
Effect of fees:
So how do all these fees affect my actual net returns? The below graph shows the aggregated past performance of my underlying investment fund or funds in comparison to the 10X High Equity (Mar 2019) over a 5, 7 & 10 year period (after fees).
So what does this mean from a rands and cents perspective?
According to the quote I received from 10X, assuming the two funds were each able to generate 6.5% real returns (after inflation but before fees) for the next 22 years (at which time I will be 65 – yikes!!), I will be roughly R900 000 richer if I switch my existing RA savings to 10X. That equates to about a 25% difference. This does not even include future contributions.
If I factor in future contributions of R20 000 per month, the difference in the value between the two funds at age 65 jumps to roughly R2.7 million. This differential is exacerbated by the fact that the average fees charged by 10X during the period drops to 0.76%, due to the higher value of assets.
There are some issues with this extrapolation. When investing in a 10X RA, as the customer gets closer and closer to retirement age, they are automatically reinvested in lower equity funds to protect them in case of a market downturn.
This means I wouldn’t be invested in the 10X High Equity Fund for the full 22 years. I suppose the same could be said with regards to being invested in the Allan Gray Balanced Fund – I would likely switch to a more conservative portfolio nearer to retirement age. While it is important to take this into consideration when assessing the comparison quote provided by 10X, I don’t think it materially affects the outcome.
Value for money score: 3/10
There was a time not so long ago when Allan Gray was considered the cool kid on the block. It did not suffer from the same legacy system and product issues that some of its bigger and older competitors did. For many years it also led the pack when it came to performance, so in the eyes of the media and financial advisors, it could do no wrong. That is no longer the case.
As often happens in these situations, the challenger has become the incumbent – slow moving and bureaucratic. It’s disappointing that is has not reduced its fees to at least remain competitive in that department.
In my opinion, it has also failed to move with the times with regards to communication and connection with clients and potential investors. As far as I can tell, it is not active at all on social media regarding investment and savings issues, which means it is not part of the conversations that ordinary investors are having. No wonder it is content to keep doing things the way it always has. This may also be why I feel a lack of connection to the brand.
I’ve never got any personal love from anyone at Allan Gray. I know they are big, but damn, it still hurts to be ignored.
From an administration perspective, Allan Gray is pretty impressive. It sends me my statements like clockwork every quarter via email and its online portal is excellent. It’s easy to top up my Retirement Annuity if I want and its LISP platform is world-class.
However, I find its statements a little frustrating as it’s not that easy to see how my retirement annuity performed in percentage terms (they give a Rand value increase or decrease, but not a percentage). I suppose you can look at the fund fact sheets for that, but if your money is split between a couple of different funds, which mine is, that becomes complicated.
I would score Allan Gray lower on this element, but I have a lot of respect for what it has achieved and its commitment to its philosophy.
Relevance score: 5/10
Unsurprisingly, it turns out that comparing providers is actually quite complicated (which is a problem in itself). However, it was really useful in the evaluation process and I highly recommend you do this exercise for yourself. I learned so much and fee really empowered by it.
Overall, I score my Allan Gray RA – in its current form – a 15/30 – or 50%.
Its barely a pass and given that this is my hard earned money we are talking about, it’s just not good enough.
That means it’s time for a switch.
Fortunately there are no penalties when switching from this type of product, but it’s important to check this if you are thinking about a similar move. Some older products, such as those linked to a life policy, can still charge as much as a 30% penalty for early termination.
I’m in the process of checking out a few other RA options, besides 10X. There are one or two slightly cheaper options out there, particularly if you are keen for some DIY investing, but with its sound performance, low fees and high relevance, it’s going to be pretty hard to beat.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.