If you age your whisky, beer or wine in wooden barrels, you generally have to be prepared to lose some of it along the way. Non-air-tight containers and evaporation mean that over time, barrels (and wine bottles with natural corks) end up with air between the liquid and the top of the container. The missing liquid is known as the ‘angels’ share’ and the remaining space as the ullage (from the French ouillage).
There is a balance to be found here. Winemakers know that they need to share a little with the angels – some oxygen is needed to break down tannins and so on – but they don’t want to overshare: too much and the wine will be ruined.
This is why wine kept in barrels is regularly topped up, but also why wine dealers look carefully at the ullage levels in old bottles. Wines kept in the wrong conditions will evaporate faster than those kept at the correct temperature and humidity. Old wines with higher than usual ullage are thus deemed to be of less value (thanks to the higher risk of oxidation) than those with normal ullage.
You’ll be wondering what this has to do with your non-wine investments. The answer is that the financial industry works on your money in a similar way to the angels on your wine. Put your hard won savings in one of their pots, leave it there for a few years and when you come back you’re almost certain to find you have less than you expected.
That’s partly down to bad investment decisions, of course, but as we have written here all too many times, it’s as much about charges, which have long been too high. The sum of £10,000 invested in a fund that grows at 7% a year would be worth £14,000 in five years if you were to pay no charges on it. Pay 1% and it will be worth £13,338. Make that 2% and it is £12,667. That’s 10% less. Over ten years, this gap widens. With no charges, you’ll have £19,670. At 2%, you’ll have £16,070. That’s £3,000 gone.
The good news is twofold. First, the fund managers are beginning to get it and are using the Retail Distribution Review to make a noise about bringing fees down. They know fees are too high and they also know that we know. Both those things are new.
Second, if you don’t want to share your money with any of the not-quite-angels of fund management, it’s easier than ever to take control over your money.
We’ve suggested a simple portfolio of investment trusts before (and I’ll update that soon), but higher dividend-paying quality equities should remain your investment of choice. How do you choose them? You probably need to accept up front that you won’t ever be another Warren Buffett, but if you do what Tim Bennett tells you and look for firms that not only have high levels of cash, but are also “both willing and able” to pay that cash out to you, you should do just fine. Tim has a few suggestions here: How to find strong dividend-payers.