A bet­TER way to look at costs

Finweek English Edition - - Creating wealth -

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

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