ARE YOU PAY­ING TOO MUCH IN UNIT TRUST

If you’re wary of high fees, take a bil­lion­aire’s ad­vice and rather go with bor­ing, low-cost in­dex funds, writes An­gelique Ruz­icka

CityPress - - Business & Tenders -

When a bil­lion­aire like Warren Buf­fett says we shouldn’t waste our money on fees as­so­ci­ated with ac­tively man­aged funds, it’s prob­a­bly best to sit up and pay at­ten­tion. He is ad­mired the world over by in­vest­ment man­agers, hedge fund man­agers and fi­nan­cial ad­vis­ers, who fly in from all over the world to at­tend the an­nual gen­eral meet­ing of Buf­fett’s Berk­shire Hath­away.

His an­nual let­ters to Berk­shire Hath­away’s share­hold­ers of­ten con­tain Buf­fett’s pearls of wis­dom when it comes to in­vest­ments and in his lat­est one he re­it­er­ated his wari­ness of high Wall Street fees, adding that in­vestors were bet­ter off with bor­ing, low-cost in­dex funds.

“My cal­cu­la­tion, ad­mit­tedly very rough, is that the search by the elite for su­pe­rior in­vest­ment ad­vice has caused them, in ag­gre­gate, to waste more than $100 bil­lion [R1.3 tril­lion] over the past decade. Fig­ure it out: even a 1% fee on a few tril­lion dol­lars adds up,” he wrote.

“The bot­tom line: when tril­lions of dol­lars are man­aged by Wall Streeters charg­ing high fees, it will usu­ally be the man­agers who reap out­sized prof­its, not the clients. Both large and small in­vestors should stick with low-cost in­dex funds.”

Steven Nathan, the CEO of 10X In­vest­ments, which spe­cialises in pro­mot­ing in­dex track­ing funds as part of its in­vest­ment strat­egy for clients, shares Buf­fett’s sen­ti­ments and be­lieves few man­agers are able to beat the mar­kets.

“Just about ev­ery fund man­ager be­lieves they can out­per­form the mar­ket, but [rat­ings agency] S&P Global’s fig­ures show that the ma­jor­ity of them don’t,” he says.

In­creas­ingly, ac­tive man­agers are find­ing it hard to jus­tify high fees. Ac­cord­ing to the lat­est S&P Indices Ver­sus Ac­tive score­card for South Africa (end­ing 2016), 72% of ac­tively man­aged South African eq­uity funds failed to beat the S&P SA DSW In­dex over a one-year pe­riod.

This group’s per­for­mance was also poor over three- and five-year pe­ri­ods as 80% and 77%, re­spec­tively, un­der­per­formed the bench­mark. Then, 77% of ac­tively man­aged global eq­uity funds trailed the S&P Global 1200 In­dex. This num­ber in­creased to 96% and 93% over a three- and fiveyear pe­riod.

Mean­while, for fixed in­come, the re­sults were mixed. Across all pe­ri­ods an­a­lysed, ac­tive man­agers beat their re­spec­tive bench­marks in the short-term bond cat­e­gory, but not in the di­ver­si­fied/ag­gre­gate bond cat­e­gory.

WHAT CAN YOU EX­PECT TO PAY IN FEES?

When faced with these sta­tis­tics, you’d think all in­vestors would run into the arms of pas­sive fund providers. But ac­cord­ing to Old Mu­tual’s cus­tomised so­lu­tion sta­tis­tics, South Africans haven’t quite lost their love af­fair with ac­tively man­aged funds, and it is un­likely to end soon.

The sta­tis­tics show that, by 2020, there will be 65% of in­vest­ments with ac­tive man­agers in South Africa, while 22% will be in­vested in in­dex­a­tion funds.

The good news, though, is that fee trans­parency has greatly im­proved.

In South Africa, fees have been sim­pli­fied un­der the Ef­fec­tive An­nual Cost stan­dards de­vel­oped by the As­so­ci­a­tion for Sav­ings and In­vest­ment SA.

It is a mea­sure that has been in­tro­duced to al­low you, the in­vestor, to com­pare the cost you in­cur when you in­vest in dif­fer­ent fi­nan­cial prod­ucts. The Ef­fec­tive An­nual Cost stan­dard is ex­pressed as an an­nu­alised per­cent­age of your in­vest­ment amount. It is made up of four charges: The in­vest­ment man­age­ment charge; The ad­vice charge (what you would pay your fi­nan­cial ad­viser); The ad­min­is­tra­tion fee; and “Other” fees, which typ­i­cally con­sist of re­main­ing charges such as trans­ac­tional banking, wrap fund and ter­mi­na­tion charges. man­aged unit trust funds in the mar­ket.

She says that ac­tive man­agers don’t al­ways un­der­per­form, and that a sud­den event or bull mar­ket can skew the per­for­mance in favour of the in­dex funds.

“I think fees are of­ten mis­un­der­stood. Peo­ple of­ten look at the to­tal fee and be­lieve it is high,” she says.

“Some think the charges are all re­lat­ing to the unit trust provider, but they also com­prise of ad­vice charges, plat­form charges and so on.”

Botha points out that Old Mu­tual Unit Trusts has gone a long way in re­duc­ing fees and has done away with per­for­mance-re­lated fees in all but one unit trust.

Nathan says that con­fu­sion has of­ten arisen when in­vestors find they are still pay­ing per­for­mance fees, even though the fund is un­der­per­form­ing. This is be­cause per­for­mance fees can be cal­cu­lated over a num­ber of years.

“Let’s say a fund did re­ally well, then it does badly – be­cause the fees are cal­cu­lated over, say, three years, you could still pay for per­for­mance fees for the pe­riod,” he says.

CAN YOU CUT THE COSTS?

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