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Sunday, June 1, 2008
Total Expense Ratios

“The compulsory display of Total Expense Ratios (TERs) has been a great success in helping investors understand the balance between costs of investment and rewards in different collective investment schemes,” says Ian Dodds, financial advisor and managing director of Fundamental Investments.

TERs were introduced by the Association of Collective Investments in April 2007 and are a measure of a portfolio’s assets taking into account expenses, expressed as a percentage of the value of the portfolio. The calculation of South African TERs are aligned with those in the UK and US: annual fees and performance fees make up the bulk of the costs, while brokerage fees and stamp duties are excluded. Initial and ongoing costs for financial advice are also excluded.
“You don’t want to pay high fees for a poorly performing fund,” says Dodds. “And when choosing a fund, investors should check that the fund manger does not have an easy benchmark with a high performance fee.
“Our research shows that investors who are looking to invest in funds classified in the Asset Allocation sector, be it the Asset Allocation Flexible, Asset Allocation Prudential or Asset Allocation Targeted Absolute Domestic should be extra careful when choosing a fund, as expenses in these are on the high side.”
On May 3rd this year, 12 funds in the Flexible category had TERs of over 4%, 14 in the Prudential sector had over 4% and 13 funds in the Targeted and Real Return sector had expenses of over 4%. By way of contrast, only two equity funds, across all sub-classifications, had TERs of more than 4%.
“Four percent in expenses is a lot to pay for some funds in these categories, considering recent 12 month performances. The performance of Flexible funds over 12 months ranged from about 12.5% to -12%, Prudential funds between 11.58 and -7.5% and Targeted funds between 20.7 and -5%,” says Dodds.
“We would caution investors not to pay fees of over 4% in retirement funds, such as those in the Prudential sector. Investors should aim for long term performance and low costs for retirement investments,” he says.
It was interesting to note how many of the institutional collective investment funds had higher Total Expense Ratios than their retail equivalents. “I don’t think this trend was anticipated when TERs were introduced.”
Fundamental Investments (PTY) Ltd is a financial services company based in Johannesburg, South Africa. The company offers personalised, transparent financial planning to individuals, as well as medium to large corporate companies.
Ian Dodds can be contacted by email at: info@pension.co.za

Copyright © Insurance Times and Investments® Vol:21.5 1st June, 2008
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