The enigma of managed fund fees vs. returns seems to be a perennial favourite discussion point on a number of the online forums I follow.
It often starts with the active vs. passive debate. Some of those opinions are pretty strong and quite generalised, when the reality can be a lot more nuanced.
On one particular Reddit thread recently, I promised I’d write a blog post on the topic, looking at how Squirrel’s Monthly Income Fund compares—both with other similar funds, and more broadly across the market.
I think it’s worth a read, particularly if you’ve ever wondered whether a higher fund fee automatically means worse value for money. You can find it here.
The fee on our Monthly Income Fund is 2.00% p.a., which (at face value) looks really high.
But in my view, the measure that ultimately matters is your risk-adjusted return after fees have been deducted. And remember, for that 2.00% fee, Squirrel finds the borrowers, assesses and settles each loan, and manages it right through to repayment.
That’s why whenever we talk about returns at Squirrel, including on our website, we always present them after fees.
Here’s how the Monthly Income Fund has performed, shown as a rolling 12-month return after fees and before tax is deducted.
On a risk-adjusted basis, we think that’s a great result.
The Fund has a risk indicator of 2 out of 7, placing it in the low-to-moderate risk category.
It compares well with other types of fixed interest funds and favourably with other residential mortgage-based funds. You can read more about the comparison in the blog.
I’ll talk a bit more about this later in the year when we celebrate the Fund’s fifth birthday. We’re super proud of how it’s delivering for our investors.
Are higher investor returns on the way?
Looking ahead, we expect the Reserve Bank to lift the OCR in September and then probably pause until late November, after the election.
If that happens, we’d expect to lift borrower interest rates and, in turn, investor returns across our various products.
Squirrel's Reserve Funds doing exactly what they’re designed to do
Over the last four weeks, we’ve successfully sold two properties via mortgagee sale, achieving better-than-expected prices.
We have one more scheduled to sell in early September, and after that, we expect things will have largely run their course for Squirrel in this property cycle.
To be crystal clear, these mortgagee sales have no impact on our investor returns. That’s why we have reserve funds in place.
The reserve funds are in great health, and they play an important role in supporting the strong risk-adjusted returns we’re delivering to you. You can always see how they’re tracking on the performance page on our website.
And remember, the reserve funds back both our term investments and the investments made by the Monthly Income Fund.
Questions, comments, ideas?
If there’s something we’re doing well, or something we could do better, I’m always keen to hear it. Just flick me an email at dave@squirrel.co.nz.
