There has been much talk and reporting in recent times about the need for Irish people to invest rather than leave money on deposit with banks. I recently looked at the returns after tax on two investment funds with major players in Ireland – one over a period of almost nine years and the other over a four-year period. These funds would have been balanced, medium-risk funds.
Taking account of the Government levy, the fund management charges and the tax on investment returns, I have estimated a compound annual return of 2.44 per cent and 2.75 per cent. While obviously better than what is available from bank term deposits in Ireland, these returns seem very small to me when taking account of market risks.
Is my experience typical of the experience of retail investors in Ireland?
If the Government wants to encourage investments in Ireland by retail investors, then the initial investment levy, the management fee structure of institutions and the tax on gains need to be addressed in my opinion.
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For transparency, projected gains on an investment should reflect the net gain for the retail investor after tax.
What other approaches can a relatively unsophisticated investor adopt in Ireland?
CA
Your letter fairly succinctly sums up the challenge facing Government as it works through the details of this investment scheme it plans to launch with the budget in October. We are told this will be designed to persuade people to invest in risk assets that generally offer a better return than bank deposits and provide a better pool of funding to try to drive the EU economy forward.
The Irish plan is part of a wider EU Savings and Investment Union plan to better compete with the US and Chinese economies while benefiting their citizens.
“We want to make investing simpler, clearer and more accessible for ordinary people, and help their hard-earned money work harder for them over time,” Minister for Finance Simon Harris said last month.
So how does that pan out in reality? You are one of the people doing precisely what the Government and the EU is trying to encourage and, on the basis of the numbers you have worked out, your return can be described as modest at best.
More importantly, it is well below what these funds themselves advertise as their returns.
You are not investing with cowboys but with two of the largest fund managers operating in the State and, as you say, these are described as medium-risk funds where you expect some volatility but also, over time, a better risk for your risk premium.
In the case where you have invested for nine years, the fund advertises its investment return as 6.9 per cent per annum over the past decade. Your experience, after deducting charges and taxes, is that your return is just over a third of this – 2.44 per cent. That is not far ahead of the more competitive term deposit rates available with zero risk.
No one is suggesting the fund is cheating anyone out of returns but, equally, no reasonable investor is going to assume a near 7 per cent annual return will deliver barely a third of that into their pocket.
So there needs to be a total rethink about the full impact of charges – and the Government needs to stop taking bites out of investment on the way in (the levy that leaves you in the red from the outset), over time (via deemed disposal that taxes your profits every eight years, inevitably reducing returns) and at the end with exit tax. A clear and simple tax structure and a reasonable tax rate to reward risk are non-negotiables.
For their part, investment funds will protest that their charging structures are clear. Perhaps to other industry professionals, they are: the various charges and their impact are anything but transparent to ordinary retail investors.
Irish people are risk averse. If the Government is serious about developing an investment culture in this State, it is going to have to ensure that there is a reasonable return for the risk undertaken and no nasty surprises.
I cannot say if your experience is typical of retail investors in Ireland, but I suspect it is and, in the absence of real reform, there are no real alternative approaches available to the relatively unsophisticated investor in Ireland. That’s the Government’s challenge.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
