New Year resolutions: Getting on top of your financial planning

How long will your New Year resolutions last in 2015? If you’re anything like most people, you’ll be doing well if you haven’t fallen off your chosen wagon by the end of the month. There is, however, a crucial exception: there’s one resolution that requires a bit of work today but only minimal attention in the future, even though it will keep paying you back for the rest of your life.

Getting on top of your financial planning is a one-off exercise you can do every January. It means reviewing your savings and investments to ensure they’re fit for purpose – that they’re helping you work towards your financial objectives and that they’re performing in line with your expectations. If not, now is the time to consider making some changes.

Step forward investment companies. For many years, financial advisers regularly argued that closed-ended funds were too complicated for most investors, but interest in the sector has soared over the past couple of years (this may or may not have something to do with the fact that intermediaries no longer earn commissions from recommending other types of funds.

It’s not difficult to see why. On average, over both the shorter and longer term, closed-ended funds have consistently outperformed their open-ended rivals. In one recent study conducted by broker Canaccord Genuity, investment companies returned more than comparable open-ended funds in 12 out of 15 sectors over 10 years, 14 out of 15 sectors over five years, and 11 out of 15 sectors over one year.

Why should this be the case? Well, in practice, there are several reasons. One important factor is charges: investment companies have in the past generally been significantly cheaper than closed-ended funds. Over time, that cost advantage has translated into superior investment performance, particularly over the longer term.

More recently – particularly since open-ended funds were banned from paying commissions – the playing field on charges has levelled. Nevertheless, investment companies retain significant advantages over their open-ended rivals.

For example, an investment company fund manager has a fixed pool of assets to manage and can therefore concentrate on picking the best investments. An open-ended fund manager, by contrast, also has to cope with ebbs and flows in fund size as demand and supply from investors fluctuates. Structure is additionally important in that investment company managers have independent boards that holds them to account – they can even be fired if performance disappoints. No such governance structure exists in the open-ended universe.

Then there is the issue of gearing. Investment companies are allowed to take on borrowing if their managers deem it appropriate – in a rising market, this boosts returns. Open-ended fund managers don’t have this option.

One final important distinction is income. Investment companies are allowed to build up reserves of income payments in good years in order to make pay-outs in more challenging environments, an option that isn’t available to open-ended companies. This has enabled dozens of investment companies to increase their dividends every year for several decades.

In other words, the investment company sector boasts a string of in-built advantages that give it a competitive edge over its open-ended opposite number. This is not to say all investment companies will outperform – and many investors will want a mix of both types of fund – but as you’re reviewing your savings and investments in the weeks ahead, make sure you actively consider closed-ended funds. This could be your best New Year’s resolution ever.