A betTER way to look at costs
INVESTORS CONCERNED about fund management costs will soon have a new tool to measure what they’re paying against the fund’s performance: total expense ratios (TERs), which became mandatory for all unit trust management companies from the beginning of last week.
TERs will express, in a single figure, all the costs paid out of a portfolio, many of which weren’t seen by investors in the past. It will include management fees, fixed costs, trading costs and liquidity costs. Put simply, the TER is the total fund expenses divided by the average market value of the fund expressed as a percentage.
It will include fees such as stock brokerage, custody fees, trustee fees, audit fees and bank charges, says Johan de Lange, MD of Allan Gray Unit Trust Management Ltd. “Key costs that weren’t shown historically that the new TERs are most likely to highlight are brokerage, which increases the costs of funds that trade a lot, and the underlying costs in a fund of funds structure.”
Di Turpin, CE of the Association of Collective Investments (ACI), says an advantage for investors is that TERs will allow them to track their fund’s expenses and compare their costs with other unit trusts. “The ACI has put in tighter governance structures concerning how performance fees are also disclosed – all reporting and disclosure will be done in a standardised way in plain English to assist the client in understanding what they’ve bought.”
Higher or lower TERs won’t necessarily imply better or worse performing funds. But higher TERs will have to be justified by relatively better performance than a fund with a low TER.
As De Lange puts it, total costs are effectively the handicap a manager “suffers” before being able to deliver enough to justify active investment management. “And the higher the costs the less likely he is to overcome this handicap.”
To give investors an idea of the TERs of cost competitive funds, Allan Gray already publishes those ratios. For example, the TER for the Allan Gray Optimal Fund for the year to end-December 2006 is 1,84%.
Foord Asset Management also discloses TERs, which for its Foord Equity Fund, Foord Balanced Fund and Foord International Feeder Fund for the same period are 2%, 2,6% and 2% respectively.
A basis for comparison. Di Turpin
Disclosing costs not shown before. Johan de Lange