Working in the City is mostly boring. Analysts fiddle with balance sheets, wondering what might happen if you moved a number here or there; brokers tell clients much the same stories about the same stocks every day; fund managers buy and sell the same stocks as they go up and down; and traders do much the same – just faster. Apart from the money, not many of these jobs have a lot going for them.
All that changed last week. Things suddenly got exciting. The dollar fell even faster than usual, egged on by rumours that China intends to sell a large part of its pile of greenbacks and buy euros and yen instead. By the middle of the week it had hit an extraordinary £2.10 against the pound – a 26-year low.
At the same time the gold price hit $841. It’s now only a whisker below its highs of the late 1970s and well over three times the price it was when Gordon Brown sold most of Britain’s stash and I started suggesting here that ordinary investors should buy.
Charles “Chuck” Prince, once the mightiest man in banking, was forced to resign as head of Citi after admitting to huge sub-prime losses. Several other banks have made similar confessions, the latest being Morgan Stanley, which has so far lost $3.7 billion (£1.75 billion).
Meanwhile, the oil price moved above $98 a barrel as a gloomy report from the International Energy Agency appeared to confirm that $100-plus is more than justified by the market’s supply and demand imbalance. Then on Wednesday the Dow fell nearly 3%, partly on further falls in financial stocks (down 20% since February) but also in reaction to the announcement that General Motors has made its biggest quarterly loss.
Just to make sure everyone gets the gravity of the chaotic situation, George Soros, the billionaire financier, told New Yorkers that the UK is “on the verge of a very serious economic correction” and Bank of England governor Mervyn King made it clear in an interview that, as far as he’s concerned, the credit crunch has barely begun.
It’s dramatic stuff. The problem, of course, is that it brings with it more than just an adrenaline rush for City workers. In this kind of environment banks can’t take the kind of risks they felt comfortable with only a few months ago and we’re already seeing the effects of that: credit-card application approvals have fallen 17% in six months and it is clearly a lot harder to get a mortgage than it was in the spring.
Worse, given how important the booming housing market is to our feelgood economy, house prices across Britain are at best static and forecast to do no better for several years to come.
None of this is good for the UK and US and, while it is not a given that stock markets underperform when economies tank, they very often do.
This means all sorts of things for investors. I’ve talked here before about making sure you have some exposure to gold and to the commodity spectrum as a hedge against market nasties.
But, given the environment, there is something else we should all be doing as well – checking out how much we are paying in fees for the privilege of being in the market at all.
This is vitally important at all times but particularly so in times of low returns. When you are making 20% a year, perhaps the odd 1% here or there doesn’t seem a big deal. But when you are making more like 5%-7% it really is.
A lump sum of £10,000 invested in a fund that returns 7% a year will be worth £14,000 in five years if you pay no fees at all. Pay 1% a year and it will be worth £13,338. Pay 2% and your money will have grown to only £12,667.
Over 10 years the gap widens. With no charges, the money is worth £19,670. At 1% it is £17,790 and at 2% it will be worth a mere £16,070 – more than £3,000 less. This is not an extreme number: Britain’s fund managers are very greedy indeed and annual management charges (AMCs) on most UK funds run on average at 1.5% to 1.7% (some are a lot higher).
There’s also a host of other charges involved in investing in most funds. In most cases legal fees, marketing costs, performance fees (which are becoming more common), admin fees and trading costs aren’t included in the AMC – making the full cost of owning most funds significantly higher.
Funds are also prone to putting up fees without much warning – there is no unit-hold-er body they have to negotiate with before doing so – and, worst of all, many charge exit fees too. So if you decide you don’t want to invest in them any more, either because they are too expensive or they are underperforming the market (as the majority do) you can’t even get out without paying another fee.
So I wonder if now might not be the perfect time to get out of traditional and expensive funds and into exchange-traded funds. These have several virtues that should serve those who use them well over the next few years.
They are cheap and easy to get in and out of; they charge low fees; and they offer direct exposure to all the most interesting bits of the market – oil, gold, silver and soft commodities. You can find out more about ETFs at londonstockexchange.com.
First published in The Sunday Times 11/11/07