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Effects of Costs

Establishing how well your investments are performing requires not only expertise, but also dedication and perseverance. This is because investment companies make a rather complicated subject even more incomprehensible with their jargon. This page shows how the performance of your investment is overstated, and the Admin Fees are hidden from you, and guide you towards a method in which to monitor the performance of your investment policies.

Before we start, let me say that this page is mainly applicable to investments in the form of policies, ie. where there is a contract (that you probably haven't read, and if you tried wouldn't make any sense off), but more importantly where the contract is between you and the company, and if you're unhappy with something is it a very private matter, with the only solution to take them to court. This is unlike shares or unit trusts, where things are also complex and there is essentially no formal contract, but more importantly where the performance of these investments are very much public knowledge, and if you are unhappy will there be thousands of other people equally unhappy, which in itself should go a long way towards resolving the matter.

The main thrust of this page is to warn you against the second trick that these companies apply to shortchange you (the first being the complexity and confusion, not to mention the difficulty in getting meaningful information out of them).
If you're lucky will you receive an annual statement indicating the performance of your policy. (If you're unlucky, will you receive nothing). But this statement will also probably confuse you, and not give the whole picture, and even if it gives the growth in percentage terms will it also be misleading. Why, because they will have quoted performance before deducting their costs, meaning that you may know what the performance of the underlying investment was, but the effective return after Admin Fees could be significantly lower.

Let's say your policy value was R100,000 at the beginning of the year, you contributed R5,000 during the year, and it's closing value is R112,000 ...
Nett Growth = Closing Value - Contributions - Opening Value
Nett Growth = 112,000 - 5,000 - 100,000 = 7,000

% Nett Growth = Growth / Ave. value of investment ... (in simple terms)
% Nett Growth = 7,000 / 106,000 * 100 = 6.6%

But, that's not the growth that investment companies provide you with....

They will add back their costs so neatly in the formula, it will nearly look legitimate, and instead show you the growth of the underlying investment, ie.
Invest Growth = Closing Value - Contributions - Opening Value + Costs
Invest Growth = 112,000 - 5,000 -100,000 + 3000 = 10,000

and hence..
% Invest Growth = Growth / Ave. value of investment
% Invest Growth = 10,000 / 106,000 * 100 = 9.4% .... neat dont you think!!!

So, not only do they overstate the true performance of your policy, they hide their costs in your Growth, so you dont even realize that there are even costs. The South African law now forces them to show their costs, which they now do more like as an afterthought and may or may not be the whole story.

The moral of the story is to not take the percentage growth that investment companies reflect on your statement as necessarily what you actually get, since some of it goes towards their costs, which they seem to think is quite a reasonable way of expressing things, I think it is downright misleading.

The last question is, what can you do if you're not happy with the figures?
Nothing, unless you're prepared to take them to court. The best is to learn from the experience, and make your next investment in reputable Unit Trusts, where there is less of a chance of being taken for a ride.

Fortunately is there a way of checking the performance of your policy. This approach requires that you obtain the opening and closing values of your policy for the period (normally one year), often with great difficulty from your investment company.