Millennials, smaller companies & innovative technology
As I walked down Portobello Market recently I was immediately drawn to a couple selling candles. Did...
The theme for International Women’s Day 2019, which is celebrated on 8 March, is ‘Think equal, build smart, innovate for change.’
And it’s a very apt theme: differences in pay between men and women is a hot topic at the moment, with the latest research suggesting that women earn £7,280 a year less than men.
While the gender pay gap for full-time employees in the UK is marginal between the ages of 18 and 39 years, from the age of 40 onwards it widens, according to the Office for National Statistics.
Meanwhile, a negative gender pay gap among part-time employees emerges in the age group 30 to 39 years, before reversing by the age of 50.
The knock on effect of this is that women will need to work an extra 4.2 years* to enjoy the same standard of retirement as their male counterparts.
This is because, as Goldman Sachs Asset Management points out: “A seemingly modest difference in starting salaries evolves into a substantial gap over time and this gap can magnify retirement income shortfalls, which are then exacerbated by longer life expectancies.”
Put simply: if you are earning less, your pension contributions – if calculated as a percentage of your salary – are less too.
As the fight for equal pay continues, hopefully the situation will right itself sooner rather than later. Learning how to negotiate a better pay rise is also a useful skill.
However, there are also steps a savvy female investor can take to close the gap herself.
The first step is invest earlier, the second is invest more and the third is to take more risk.
If you invest enough at an early age, you can close the gender pay gap yourself – effecting paying yourself an extra £7,280 a year.
For example, my first boss used to tell me to split my salary into thirds: one for savings, one for bills and one for fun. If you invest £550 a month from age 25 (based on a £20,000 annual salary, which is at the lower end of the range for graduate starting positions in 2018-2019*), by the time you are 40 you could have a pot of money worth £150,000**. From this pot you could take 5% per annum in income (that extra £7,280).
If you invest more, you can also close the gap. Even an extra £100 a month can make a huge difference on your total investment over a number of years. A good way of increasing your savings over time is to make sure you increase the amount you invest by the same proportion as any pay rises you get – even if they are smaller than your male colleague!
Does that sound like a lot of money? If you take more risk, you could hopefully get higher returns over the long-term.
For example, moving away from our hypothetical example to a real one, looking back over the past 15 years, you could have invested a lower amount of £500 a month in the average UK equity income fund and achieved a pot of money worth £151,563***.
However, if you had taken more risk and invested in the average UK Smaller Companies fund, you would only have needed to invest £375 per month over the past 15 years to get a pot of money worth £151,429*** – because the returns were higher.
Of course, past performance is not a guide to future performance, and the value of your money can go down as well as up. But with a longer timeframe and regular monthly investments, the extra risk could be worth taking.
If you like the idea of giving yourself a hefty pay rise later in your career, here are some funds to consider.
Managed by Giles Hargreave since 1998, this fund has evolved as it has grown over the years. Relatively small positions in companies are usually taken initially, and then added to as the team becomes more comfortable with the business and the management delivers on its plans. Throughout its history, returns for this fund have been nothing short of exceptional.
All companies in this fund must be profitable at the time of investment. The managers avoid low quality, cash-burning stocks, instead looking for businesses with lasting competitive advantages, experienced management teams and strong balance sheets. It is a small, flexible fund with a solid investment process and a highly competent team and can produce a natural income, currently at 2%.
This fund has recently been awarded an Elite Radar. Launched in November 2018, it is run by two very experienced and highly regarded managers who have recently set up their own business. It focuses on smaller companies, avoiding micro-caps and mid cap stocks and meeting company management is integral to the investment process.
**illustrative figures assume an annual return after charges of 5% and do not include inflation
***Source: FE Analytics, total returns in sterling, 31 March 2004 to 28 February 2019, using the IA UK Equity Income and IA UK Smaller Companies sector averages.