Grant Maxwell’s assessment of the 10X Retirement Annuity (‘Find the best retirement annuity for you’ Moneyweb soap box 25 February 2018) falls short on both counts. His article suggests that 10X is underperforming its benchmark, relies on back-tested performance data, and overstates the cost differential between the average industry RA and the 10X RA.
If he had contacted 10X for comment before publishing he could have avoided the factual errors and misconceptions in his article.
The 6,5% pa return used by 10X in the graphic reproduced in the article (and below) approximates the historical long-term real (after-inflation) return of the asset allocation underlying our High Equity portfolio. But this is not our benchmark, and nowhere do we say that it is.
The graphic makes it clear that 10X uses index funds (ie harvests the average market return), and it should be apparent from our website (which Mr Maxwell visited) that 10X does not attempt to manage the return through market timing either.
As future market returns are unknown, it would be folly to have an absolute return as a benchmark, as he suggests, because that is entirely in the hands of the market. A writer with some knowledge of investing should know that. The performance gap he suggests is therefore not a “tracking error”, but a reflection of recent market returns.
We say “recent” because Mr Maxwell references the 10X Prime High Equity Fund as the source for his “tracking error”. That fund was launched in December 2015, hardly an appropriate period to judge the return of a long-term savings product.
Ten years would be more suitable. The 10X High Equity portfolio used in our retirement funds (the identical portfolio underlying the 10X RA and 10X Prime High Equity unit trust) does have a 10-year record. For benchmarking purposes, we track our performance against the monthly returns in the Alexander Forbes Large Manager Watch (LMW) survey in the ‘Global – Best Investment View’ category.
The 10X fund’s annualised return of 11.3% (5,5% pa above inflation) over the decade is 0.8% above the large fund manager average before fees, and 1.9% above the large fund manager average after fees. Net of the estimated fee impact, just one of the 14 portfolios in the survey (that lasted the full distance) outperformed the 10X portfolio, and then only by 0.3% pa.
The point is 10X has a well-established track record and does not need to rely on back-tested performance. We are not using “6,5%” to suggest future returns, but simply as a basis to illustrate the fee impact. The graph merely shows the impact of paying 2% pa more in fees over a consistent 40-year savings life, the arithmetic reality of compounding returns at a lower rate. But this performance gap manifests irrespective of whether the returns are 6,5% v 4,5%, or 17% v 15%.
Nowhere does it say that investing with any particular competitor would deliver 40% less. We don’t know how any individual competitor will perform. We are simply talking about the impact of average industry fees on average investors.
Mr Maxwell takes objection to our claim that the average industry RA costs 3%, which is based on National Treasury figures. His own research suggests 1,61% plus VAT (ie 1,83% incl. VAT). Seeing that this is the average, it of course means that half the funds charge more.
But 10X is talking about total fees, including advice (0,75% pa plus VAT) and administration (0.25% plus VAT). Most South Africans employ financial advisers, who still charge commissions. Considering these two fees brings us near 3%, even before factoring in some of the other industry charges that we come across regularly when we do comparative quotes.
The 10X RA does not require (but also does not preclude) the use of a financial adviser. The product is available directly online, and already incorporates all the essential elements of long-term investing in its design (keeping costs low, avoiding active management risk, avoiding market timing, automatically aligning the asset allocation to the investor’s time horizon, disciplined rebalancing etc).
The 10X ‘1%’ fee quoted by Mr Maxwell already includes VAT. This is our highest fee (0,90% plus VAT, ie 1,03%). However, the average fee falls as the investment balance grows.
Further, 10X does not charge a separate administration fee.
Without wishing to delve into the rest of his article, we do greatly object to one of his other points, that it does not matter if fees are 5% or 1%, if both funds earn the same after-fee return.
No fund manager guarantees their future return. And higher fees do not promise a higher return. Suggesting that these two funds “are the same” borders on many things, none of them complimentary.
The lesson for investors should be to control what they can. Essentially that is their asset allocation and fees. And their own behaviour. But no amount of studying the past performance of active managers will promise a higher return.
As Warren Buffett (already famously) put it over the weekend: “Performance comes, performance goes. Fees never falter.”
