|
Most people are willing to pay a fund manager more when he performs above his benchmark. As performance fees are now used more readily by fund managers, the unit trust industry has introduced a transparent way of looking at the actual costs of running a unit trust fund.
The unit trust industry has therefore introduced a new measure known as the Total Expense Ratio (TER).
Total Expense Ratio (TER)
Business Report, May 2007
Every investor should understand the costs of buying any investment and how those costs can impact on returns. In South Africa investment has in the past by and large been focused on performance and certainly the performance of equities has been excellent in recent years overshadowing the issues of costs.
The Collective Investments industry has a proud record of cost disclosure with the cost of buying and selling a fund fully disclosed at the time of the deal. Added to this deregulation of all charges and fierce competition and one has an investment which is hard to beat.
The industry has now taken this cost transparency a step further and is showing the actual costs of running a fund. Investors can compare the costs of one fund with another and these figures are published in the media, on websites and in marketing material. Called the Total Expense Ratio (TER) these figures will show investors the impact of fund costs on actual returns. It is important to emphasise that these are actual historical costs and not forecasts.
TER's measure how much of portfolio's assets went to operating costs. This is published as a percentage of the daily average value of the portfolio and covers 12 months. Some of the fees included in TER's are: Management fees (including performance fees) Fixed operating costs such as custody and trustee fees, audit fees and the Fund's own bank charges Value Added Taxes For investments in other funds: The weighted portion of the underlying portfolio's TER (for funds of funds), upfront fees and exit fees Where income is earned by the providers of scrip lending services and if this income is not passed back to the portfolio, such an amount that is retained by the provider must be included. TER's do not include costs for advice from a broker or financial consultant, the investor's bank charges or broking costs. The latter was omitted to bring South African TER's in line with those overseas. Costs which apply to specific products which invest in collective investments such as a retirement annuity are also excluded.
The industry has also introduced full disclosure of performance based fees and these are shown separately from TER's. Both advisors and investors will now have a wealth of information from TER's which dramatically improve transparency. It is important to note that a fund's TER does not focus on risk and should not be the main factor in deciding whether to invest. A fund choice should be based on how well the investment fits in with your appetite for risk and investment goals.
In interpreting TER's one may find that smaller funds may have higher TER's than large funds due to their higher fixed costs per unit. Investments in funds that have tiered structures are also likely to have higher TER's due to the multilayering of fees.
A high TER may also not be an indication of a bad investment choice particularly if the fund outperforms other funds. In assessing TER's investors will also have to compare fund types with similar funds, investment mandates and those with similar fund structure: Equity funds should of course be compared to other equity funds, bond funds with bond funds and funds of funds with other funds of funds.
In summary:
The TER reflects the actual operational running costs of a particular unit trust fund and is not a new or additional cost. From now on every unit trust Fund Fact Sheet will show the TER in percentage terms. Therefore, if your fund has performance-based fees and the TER is high, this is a good thing because you are getting good performance.
Silke Financial Services has the expertise to advise you on which unit trust funds have the most appropriate TER’s for their respective measures of volatility and relative performance.
Ken Silke
E-mail: ken@silke.co.za |
