If you don’t want to be ‘Madoffed’, à la the eponymous investor whose giant Ponzi scheme led many to lose their life’s savings, or even just to suffer poor performance, it’s worth putting a little bit of time and effort into the process.
And remember, don’t feel overwhelmed – it’s your money so don’t hesitate to ask the tough questions.
Can a dividend fund provide an income?
While unit-linked funds don’t pay dividends, there are still plenty of others that do, including some exchange-traded funds (ETFs). As Rory Gillen, founder of InvestR Centre, points out, while European stock markets suffered last year, the dividend yield on one European ETF was close to 5 per cent.
You will also need to know if the dividend is sustainable. But, as Gillen suggests, by opting for a diversified European ETF, while the dividend might be reduced, the “concept of it being eliminated wouldn’t happen”.
Can you explain the fund’s investment strategy to me?
The general advice is that if you can’t understand a product that is being explained to you, then you should just say no. As Gillen points out: “Most times, you’re not talking to a fund manager, you’re really talking to a product seller.” So if you can’t understand the investment rationale that this person is putting forward, the possibility is that they don’t either, and you might be better off looking for another option.
How is tax levied on the fund?
Funds are typically taxed on a gross roll-up basis, which means that they are allowed to grow free of tax until either you decide to sell, or their eighth anniversary. Last December’s Budget increased the tax applying to any gains on investment funds from 30 to 33 per cent. However, you will need to check with your fund manager whether or not this tax is collected at source, or whether you need to declare it to the Revenue Commissioners.
As Marc Westlake, head of wealth management at GoldCore points out, unit-linked funds of the type typically offered by insurance companies generally take care of all tax requirements – but for international funds, or ETFs purchased through a stockbroker, this isn’t usually the case.
As such, it is up to the investor to report these transactions to the Revenue – and if you don’t keep on top of this, you might be taxed at your marginal rate, rather than 33 per cent.
What are the total charges on this fund?
In other jurisdictions, fund managers must disclose a Total Expense Ratio (TER) for their funds, which incorporates all relevant charges. In Ireland, however, this is not the case, so it’s very important to query the manager on exactly what charges might apply.
While the typical managed fund charges at least 1 per cent per annum, you can look out for cheaper options through an online or traditional stockbroker. These include exchange-traded funds (ETF), which would incur a transaction charge starting at about €20, and an annual TER of between 0.25 and 0.75 per cent.
Charges can have a significant impact on the performance of the fund, particularly over longer periods of time. “The compound interest effect of losing 1 or 2 per cent per annum is dramatic, and for pensions it’s absolutely critical,” notes Westlake.
But the only way to be sure of how much you’re paying out in fees and charges is to assess a fund’s audited and reported account. However, as Westlake points out, there are no regulatory requirements for that information to be disclosed if it’s a unit-linked fund.
How do you get paid? Do you earn commission on this transaction?
While financial advisors have a duty of care when advising their clients, and this has been strengthened under the new Consumer Protection Code, you should ask someone who is advising you how they get paid. Typically, you will be sold a fund not by a fund manager but by a financial advisor – who may be earning commission on each transaction. The greater their commission, the more they may be persuaded to push certain products on you. “My sceptical view has consistently been that the industry has been geared towards selling product because that’s the way the indsutry is structured,” says Gillen.
How much does this investment have to increase in value before I break even?
This can provide a sobering insight into whether or not a fund might suit your needs. While you might be impressed by a manager’s expectations for growth, it is important to factor in how costs might eat away at your returns. For example, if a fund is promising a return of 10 per cent but has total charges of 6 per cent, then you might be better opting for a risk-free deposit account paying 4 per cent.
Is there a capital guarantee?
Unsurprisingly, given the uncertain economic environment, funds which offer some element of capital protection are very much in vogue. This guarantee can offer some investors peace of mind. However, there is a cost. “I see this whole trend as being shocking in terms of the added costs. The minute you introduce a guarantee, you very quickly cut in half your possible return,” says Gillen.
How liquid is my investment?
It is important to verify how easy it will be to access your investment. While most unit linked funds can typically be en-cashed as you desire, there may be limits on other types of funds. For example, some investors in property funds were hit badly a number of years ago when they found that poor performance meant that they could not withdraw their funds.
How has the fund performed in the past?
“Past performance is not always that relevant, because it’s very hard to distinguish between the performance of a manager and the performance of an asset class,” says Gillen. However, you will probably still want to know how much it has returned in the past. One way of assessing this is to see whether or not the manager has beaten the asset class benchmark during the period under review.
And how expensive the fund is can also be a factor. “In any robust study of performance of investments, the cheaper fund tends to do better on average,” says Westlake.
What might future performance be, and what will this depend on?
“Fund managers shouldn’t be promising performance,”says Gillen. “The job is for everyone around the table to understand that risk assets are what they are and if they’re correctly valued you have a good chance of making money in the long-term.”
