Fund fees go to zero

US asset manager Fidelity Investments earlier this month took the competition for lower fees to its ultimate conclusion, becoming the first firm to offer index funds that cost nothing.

It announced it was launching two new funds that will charge no annual management fees. Investors will only be able to access them on Fidelity’s platform, which will also charge no account service fee.

The free lunch

The benefit to investors is obvious. However, from an industry perspective, one has to ask how a manager can charge nothing for its services.

“There are always actual costs incurred in managing a fund that you can’t get away from,” Nerina Visser, exchange-traded fund (ETF) strategist at etfSA, said. “You have to pay things like brokerage on trades, statutory charges, audit fees and trustee fees that are all compulsory in the management of a fund.”

Fidelity will therefore, inevitably, be running these funds at a loss. In a recent note, Morningstar’s director of manager research, Russel Kinnel, suggested the intention appears to be to attract new clients.

“Fidelity can afford to offer index funds below their cost because they will make it up with all the other funds and brokerage services that clients will buy,” Kinnel said. “Other parts of the business remain quite profitable.”

As one of the largest asset managers in the world, Fidelity has assets under management of close to $2.5 trillion. That is one and a half times the entire JSE and gives it the scale that allows it to take a loss on some products if this helps to grow its overall business.

“As a business decision you can decide that you are going to be offering certain funds at a lower cost to attract volumes and grow your market share,” Visser said.

Will zero fees come to SA?

SA investors hoping to pay nothing for their investments in the future shouldn’t expect one of the major index providers to be the ones to satisfy them. It is more likely one of the large active managers with index-tracking capabilities – such as Stanlib – could lead the drive to lower fees.

However, Visser believes it is not going to be as easy to do in South Africa as in the US.

There are currently issues in the local market with how dividends from scrip lending are treated. The person who has borrowed the stock has to pay over those dividends to the owner, however, the South African tax authorities regard this as income rather than dividends.

“So there are regulatory hindrances,” Visser said.

Moneyweb

Sygnia’s announcement that it was closing all of its funds of hedge funds has raised a lot of debate about these strategies. Are hedge fund managers fleecing investors by charging high fees and not delivering on their promises, or is there real value in what they are offering?

The first thing worth noting is that while Sygnia’s decision to ditch hedge funds completely may be extreme, it is certainly not the only firm reducing its exposure.

Local hedge funds have been losing assets over the last 18 months as a number of institutional investors have reduced