“Price is what you pay, value is what you get” – Warren Buffet
When making any purchase – be it a car, a meal, or a service – most of us naturally weigh up what we’re getting for our money. It’s not just about the lowest price, but about getting the most value for every dollar spent. This principle is just as relevant, if not more so, when it comes to investing your hard-earned money.
In this article, we’ll explore what “value for money” means in the world of investments, why it matters, and how you can apply this thinking to your own portfolio, even if you’re not a financial expert.
What does “Value for Money” mean in investing?
Value for money is about maximising the benefit you receive for every dollar you invest. In everyday life, it’s easy to spot: a well-made jacket that lasts years, or a mechanic who fixes your car properly the first time. With investments, the concept is similar, but the assessment can be more complex.
When you invest, you’re essentially buying a service – whether it’s a fund manager’s expertise, access to a particular market, or a specific investment strategy. The question is: are you getting enough in return for the fees you pay?
Value for money is about maximising the benefit you receive for every dollar you invest.
Cost vs Value: Not always the same thing
It’s tempting to focus on cost alone, especially since low-fee investment products are widely advertised. However, as with any professional service, the cheapest option isn’t always the best. You wouldn’t necessarily choose a doctor or lawyer based solely on price, and the same logic applies to investing.
In the investment world, there are two main types of funds:
- Index (or “passive”) funds: These aim to mirror the performance of a particular market or sector, such as the NZX 50 or S&P 500. They don’t try to pick winners; they simply follow the market. Because there’s little research or active management involved, the fees are very low-sometimes as little as $1.50 per year for every $10,000 invested.
- Active funds: These employ teams of professionals who research and select investments they believe will outperform the market. The fees are higher, reflecting the cost of this expertise.
The key is to compare what you’re getting for the fees you pay. If an active fund consistently delivers better returns or reduces risk compared to a low-cost index fund, it may well justify the higher fee.
Measuring value: Returns and volatility
One of the advantages of investing is that performance can be measured. You can directly compare the returns (how much your investment grows) and volatility (how much returns fluctuate) of different funds.
- Returns: This is the growth of your investment over time. Higher returns are obviously attractive, but they often come with higher risk.
- Volatility: This measures how much the value of your investment goes up and down. Lower volatility means a smoother ride, which can be just as valuable as higher returns, especially if you prefer stability.
For example, some active funds may not always beat the market in terms of returns, but if they achieve similar returns with less volatility, that can be a valuable outcome for many investors.
The track record: Do active managers add value?
Research shows that most active fund managers struggle to beat the market over time. For instance, a recent study found that in Australia, 77% of active funds underperformed the ASX 200 over one year, and 85% underperformed over 15 years. This suggests that only a minority of managers are able to consistently add value.
So why not just invest in the winners? The challenge is that it’s very difficult to identify in advance which managers will outperform in the future. Past performance is not a reliable indicator of future results – a well-known truth in investing.
However, there is a broader universe of funds, not always captured in these studies, that do add value either by delivering higher returns, reducing volatility, or both. These are the managers that professional firms like ours spend considerable time researching and tracking.
Real-world examples: Value for money in action
Looking at New Zealand-based funds that invest in Australasian shares, some have delivered higher returns than the market benchmark, but with more volatility. Others have matched or slightly underperformed the market, but with less volatility. The most attractive funds are those that have managed to achieve both higher returns and lower volatility.
Internationally, there are even more opportunities to find managers who add value. Over the past decade, some global funds have outperformed the market (for example, the MSCI World Index) with less risk, while others have delivered higher returns, albeit with more ups and downs.
But it’s important to dig deeper. Outperformance can sometimes be the result of luck, a few concentrated bets, or strategies that may not be sustainable as the fund grows. Understanding how results were achieved is crucial to assessing whether the fund truly offers value for money.
The role of fees
Fees are a necessary part of investing. They pay for the expertise, research, and administration required to manage your money. While it’s important not to overpay, it’s equally important not to focus solely on fees at the expense of potential value.
If a fund manager can deliver higher returns or reduce risk, paying a higher fee may be justified. After all, in most areas of life, the best performers are rarely the cheapest. The goal is not to pay the lowest fee, but to get the best value for what you pay.
If a fund manager can deliver higher returns or reduce risk, paying a higher fee may be justified.
Looking ahead: How to find value for money
Identifying value for money in investing is easier in hindsight, but the real challenge is doing so in advance. This requires careful research, ongoing monitoring, and a willingness to diversify across a range of funds and strategies.
Here’s how you can approach it:
- Diversify: Don’t put all your eggs in one basket. Spread your investments across different funds, sectors, and regions to manage risk.
- Compare performance: Look at both returns and volatility, not just one or the other.
- Understand the strategy: Ask how the fund achieves its results. Is it through research, unique insights, or something else?
- Be fee-aware, not fee-obsessed: Consider fees in the context of value delivered, not as the sole deciding factor.
- Work with professionals: A good adviser can help you navigate the complexities of the investment landscape and identify opportunities that offer genuine value.
Our Approach
At Saxe Coburg, we focus on finding and allocating capital to fund managers around the world who have demonstrated an ability to add value-either by outperforming the market, reducing risk, or both. We don’t chase the lowest cost, but rather the best value for our clients’ money.
Over the past decade, our growth portfolios have delivered returns of 9.5% per year with volatility in the 6-7% range, reflecting our commitment to balancing growth and stability.
Final thoughts
Value for money is a principle that applies as much to investing as it does to any other area of life. By focusing on what you’re getting for your money-not just what you’re paying-you can make smarter investment decisions that help you achieve your financial goals.
If you’d like to discuss how we can help you find value for money in your investments, please get in touch. We are here to guide you through the options and ensure your wealth works as hard for you as you have for it. Get in touch with Mark or Sam to discuss howe we can support your financial goals.
This article is intended to provide general information and does not constitute financial advice. Please speak with your adviser before making any investment decisions.