Why low investment fees shouldn't be your only priority

Posted by Stephen Sutherland on Thu, Jan 10, 2013 @ 01:00 PM

Low investment fees shouldn%27t be your only priorityIn this new series of posts I'm going to take you through 7 mistakes that fund investors sometimes make. By avoiding these, you'll give yourself a much better chance of arriving at your financial goals on time.

If you would like to know more, please just download our latest free report, The 7 Biggest Mistakes Fund Investors Make.

The first investment mistake I'd like to discuss is focusing on low investment fees above all else. Let me be clear. When investing in funds, there is nothing wrong with trying to keep your fees, charges and costs low. For example, I encourage you to fight for every percentage point by using ISAs and SIPP wraps to protect your gains from the tax man and I strongly recommend you manage your portfolio on a low-cost dealing platform, such as Fidelity’s Fundsnetwork, Cofunds or Hargreaves Lansdown. The mistake investors make is therefore not with aiming to keep fees low – instead it’s when investors put low investment fees as their ‘highest priority’ when deciding which fund or funds to buy. 

Look for exceptional managers not just low investment fees

For example, even though the Total Expense Ratio, the ‘TER’ of a fund is important, in my opinion it’s not as important as the future expected return of a fund. My feeling is, what’s the point of buying a cheap fund if it underperforms the market by a wide margin? Instead of focusing on the cheapest funds, my suggestion would be to target funds likely to help you to ‘beat’ the market. And I say, if that means selecting a fund with a high TER, so be it. When I search for funds to buy, instead of looking at the fund with the lowest fees, I focus on the ones being managed by exceptional fund managers.

I like to make sure the fund manager has proven they can beat the market in the short and the long-term. I compare the fund manager’s performance against the Nasdaq Composite. I use the Nasdaq  – the US technology index – because it’s arguably one of the strongest indexes in the world. When I see they’ve beaten the Nasdaq, it tells me I’ve found a star and it also tells me the probability the manager is going to continue to perform well in the future is high. Of course there are no guarantees they will continue to outperform but I like to think in terms of probabilities.

In my mind, fund managers are like football managers. The best managers have a strategy that works. Think Sir Alex Ferguson of Manchester United. What are the chances he will perform well next season? I’m sure you’d agree that the likelihood is high. I’ve found that this is exactly the same with fund managers. The ones that have performed well in the past do tend to continue to perform well in the future. However, let’s not forget that fund managers have mandates. This means they are restricted to where they can invest. This is the reason that sometimes you see some star-performers not continuing to perform well.

Focus on outperformance

What I’ve found is that the reason they stop performing is not because their strategy no longer works, but because the money flow has moved out of the areas they ‘have’ to invest in. So how do you combat this? I suggest you make a list of superstar managers who have proved they can beat the Nasdaq over the long-term and when the market gives you the confirmation that we are in an uptrend, find funds that are ‘beating’ the market right now. In other words, search for managers that are outperforming the Nasdaq in the short-term. Some of the star performers won’t be, but some will. The ones that are outperforming are the ones to focus on. These are the ones that I like to buy. I then stay invested in the fund until I see the market’s trend change to a downtrend, or if I see that the fund starting to underperform.  

As always, if you have any questions or thoughts on the points I've covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.


ISACO is a specialist in ISA and SIPP Investment and the pioneer of ‘Shadow Investment’, a simple way to grow your ISA and SIPP. Together with our clients, we have £57 million actively invested in ISAs and pensions*. 

Our personal investment service allows you to look over our shoulder and buy into exactly the same funds as we are buying. These are investment funds that we personally own and so you can be assured that they are good quality. We are proud to say that by ‘shadowing’ us, our clients have made an annual return of 12.5% per year over the last four years** versus the FTSE 100’s 7.4%. 

We currently have close to 400 carefully selected clients. Most of them have over £100,000 actively invested and the majority are DIY investors such as business owners, self-employed professionals and corporate executives. We also have clients from the financial services sector such as IFAs, wealth managers and fund managers. ISACO Ltd is authorised and regulated by the Financial Services Authority (FSA). Our firm reference number is 525147.

*15th November 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients. 
**(31st December 2008 - 31st December 2012).
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Topics: ISA investing tips, Investment strategy, Investment mistakes