Are compounding fees jeopardising South Africans’ financial freedom at retirement?

Kingsley Williams, Chief Investment Officer; Nico Katzke, Head of Portfolio Solutions; Lauren Jacobs, Senior Portfolio Manager; and Duma Mxenge, Head of Business and Market Development – all of Satrix*

In the world of investing, the adverse impact of high fees on long-term returns is well-documented. Just as compound returns work their magic to create wealth over time, compounded high fees have a stunting effect on growth in the long term. This understanding is crucial, especially in the South African context, where few people can afford to retire comfortably. The cumulative effect of paying lower vs higher fees over time could make a material difference to an individual’s retirement outcomes.

Compounding fees and compounding returns

Investors globally are beginning to recognise the critical impact of fees on investment returns. Many, however, still do not fully appreciate how much they pay in fees over a lifetime, often lacking a counterfactual scenario to compare against. Although fees are not the only consideration for investors – sound advice, especially regarding tax matters and asset class decisions, may justify the cost – they should be mindful of not overpaying. If a similar strategy delivers largely similar results, they should be asking the tough questions.

Satrix, a pioneer in rules-based and indexed portfolios, offers a significant advantage over more traditional actively managed balanced funds, with a reduced fee benefit ranging anywhere from 30 to 60 basis points (bps) per annum. This seemingly small difference can compound significantly over time, providing a consistent source of outperformance, or alpha, all else being equal. In addition to this fee advantage, the Satrix Enhanced Balanced Tracker Fund also leverages other sources of alpha, such as Tactical Asset Allocation (TAA) and Portable Alpha strategies. It is this trifactor of low fees, Tactical Asset Allocation and Portable Alpha that makes the magic happen.

The compounding benefit of lower fees is illustrated in the graph below, which shows the net of fee returns on a rolling three-year-annualised basis. It shows a very high degree of outperformance consistency from the Satrix Enhanced Balanced Tracker Fund versus the Global LMW Median. Over the past 10 years, with the fund achieving significant scale (c. R11.5bn as at 31 May 2024), it has delivered an even higher degree of outperformance consistency.

Do the returns justify the fees?

These graphs illustrate that consistently paying higher fees for a traditional actively managed balanced fund may not be justified in terms of the comparative returns over time – even on a gross-of-fees basis. In fact, if you compare the Satrix Enhanced Balanced Tracker Fund with the Global LMW Median, where the latter represents the median performance of a range of actively managed balanced funds, you can see that following an indexed approach has not left members at a disadvantage; on a net-of-fees basis the advantage is even more compelling.

The bottom line? People are potentially paying a significant amount in compounding fees over time, which are not necessarily justified by the results.

It is always a matter of time

Compounding – the so-called eighth wonder of the world – requires time. Not all compounding is equal; the greatest risk to long-term investment is not taking enough well-rewarded risk. Longer-term horizons (more than five years) mean investors can be less sensitive to taking on well-rewarded risk such as equity exposure. It also gives investors more chance of outperforming inflation.

To illustrate, if you were to have invested R1 000 on any day in the past 20 years into the local FTSE/JSE Capped SWIX Index – the local equity benchmark tracked within the Satrix Enhanced Balanced Tracker Fund – the probability of outperforming long-term inflation (assumed at 6% throughout) increases significantly with the length of the holding period. Clearly, holding investments for longer periods puts the odds firmly in your favour.

Source: Satrix & FTSE/JSE

It is imperative for South Africans to adopt a longer-term mindset around retirement and the factors that will contribute to successful outcomes – such as preserving rather than withdrawing their savings when possible. Fees are another important – and little talked about aspect – that should be considered. It is critical that clients know what they are paying and how these amounts compound over time.

By understanding the importance of long-term investment horizons and the potentially detrimental effects of high fees, investors can make more informed decisions that align with their financial goals and likelihood of achieving financial freedom in retirement. Satrix is committed to democratising investment and empowering more South Africans to earn robust returns while paying minimal fees to do so.

*Satrix is a division of Sanlam Investment Management