It's a well established fact that constantly switching portfolios will harm your long-term investment outcomes. But what if your retirement annuity (RA) has underperformed for the past five or even 10 years?
One of your primary concerns in deciding whether to move it should be to examine the impact that high fees might be having on your investment results.
Fund performance is usually reported net of fees, and often when your funds appear to have performed badly, it might be the result of excessive fees eating into returns rather than a reflection of the performance of the portfolio.
It stands to reason that a portfolio that utilises the same investment benchmark and is invested in similar asset classes, but charges lower fees, has a far greater chance of achieving the targeted returns.
To demonstrate the benefit of lower fees on investment outcomes, here is an example of a 45-year old investor who holds R550000 in their retirement annuity and wants to decide whether to switch portfolios.
The investor’s current portfolio, the Old School Portfolio, targets average returns of 10percent a year before fees, and charges investment fees totalling 6percent a year. The alternative investment, the New School Portfolio, also targets 10percent per annum, but only charges 1.2percent in fees.
If the investor moves their funds, they would pay a penalty of R40000 from their R550000 retirement capital, which would leave them with an initial lump sum of just R510000.
If both portfolios achieve their performance targets, the 4.8percent reduction in annual investment fees means that despite having paid the penalty charges, the new portfolio would outgrow the old one by more than R38000 within three years.
In 10 years, it would have outperformed the old one by more than R371000. By the time of the investor’s retirement at 65, the portfolio would be worth R2.75million, more than double the old one, which would have achieved just R1.2m
Before you switch, however, there are a few other key points you need to factor in, namely:
* Investment objectives: if your investment objectives have changed since you first invested, you should carefully consider whether a new investment portfolio is aligned with your current investment needs
and goals.
* Past performance: while past performance is no guarantee of future returns, you need to examine the historical performance of any new portfolios before making
a decision.
* Guarantees and benefits: traditional RAs sold by life insurance companies may carry additional benefits such as investment guarantees, life or disability cover that may be cancelled if you switch.
* Flexibility: new generation RAs usually offer the benefit of greater flexibility allowing you to adjust your underlying investments, and pause or change contributions.
* Section 14 procedure: when you transfer your retirement fund, you and your new investment provider will need to obtain the necessary transfer documents from your current provider and then apply to the Financial Sector Conduct Authority for approval.
Roanleigh Thambiran is the head of business development at Cannon Asset Managers.
PERSONAL FINANCE