How to get bang for your buck
INVESTMENT FEES: MAKE SURE YOU GET WHAT YOU PAY FOR
You can chop up the value your fund manager adds in myriad different ways.
Determining value of above-benchmark fees for your collective investment scheme is like weighing the cost-effectiveness of a luxury German sedan against a Korean family car.
If a fund delivers a 100% return in a year, an investor will probably have no qualms sacrificing 10% in fees.
But if the return was 11%, forfeiting 10 percentage points in costs would make no sense.
The nub
This is probably the most important point when evaluating fees, says Pankie Kellerman, chief executive officer of Gryphon Asset Management. It is not about the absolute quantum, but what you buy for it.
Calculations compiled by Itransact suggest that if an amount of R100 000 was invested over 20 years at an investment return of 15% per annum (inflation is an assumed 6%) at a cost of 1%, the investor would lose 17% of his returns to fees. If costs climb to 3%, the investor would sacrifice almost 42%.
The introduction of the Effective Annual Cost (EAC), a standard that outlines how retail product costs are disclosed to investors, should make this easier.
Shaun Levitan, chief operating officer of liability-driven investment manager Colourfield, says the time spent looking for reduced cost is time worth allocating.
Figures shared at a recent Absa Investment Conference, suggest that the median South African multi-asset fund had a total expense ratio (TER) of 1.62% in 2015, compared to 1.67% in 2007.
The maximum charge in the same category increased from 3.35% in 2007 to 4.76% in 2015. But the minimum fee reduced quite significantly from 1.04% to 0.44%.
Lance Solms, head of Itransact, says fees remain relatively high because customers are not vigilant. He argues investors stick to well-known brands, even if they have access to products at a cheaper fee. But there are other factors. Compliance requirements have resulted in significant cost implications, Kellerman says.
And the value-chain includes parties whose interests conflict with the client’s.
These include the linked investment service providers (Lisp platforms), brokers, multi-managers and fund managers.
The hope is the introduction of the Retail Distribution Review (RDR) will eliminate conflicts of interests and frame costs in a different perspective.
“Do clients get value for money? I think the answer to that question is relatively simple. The answer is no.”
Kellerman says ultimately the question is rather what added value investors receive.
Great expectations
Do investors really participate in the upside? Does the money paid contribute to portfolio earnings? Is the Lisp’s product list biased towards the holding company’s products or is it independent?
The consideration should rather be what goal the investor is trying to fund.
The next steps would be to come up with the right equity or fixed income benchmarks and to find a manager that will be able to predictably provide returns in line with or in excess of those benchmarks over time, he says.