Coronation Fund Managers will not charge performance fees on any of its South African multi-asset funds and will change how it charges performance fees on its equity-based funds from October 1.
The asset manager also announced this week that it wants to change the benchmarks and investment mandates of some of its funds.
Coronation, which has won the Raging Bull Award for South Africa’s best management company six times, has some of the biggest unit trust funds on the market.
(For a table that sets out all the fee changes, go to the link at the end of this article.)
As a result of the change to the fee structures, all four of Coronation’s funds in the South African multi-asset category will no longer charge performance fees. The Balanced Plus Fund (a multi-asset high-equity fund), Balanced Defensive Fund (multi-asset low-equity) and Strategic Income Fund (multi-asset income) already charge only a fixed annual management fee. The performance fee on the Capital Plus Fund (multi-asset medium equity) will be scrapped, but its annual management fee will be increased from 1.25 percent to 1.4 percent.
The annual fee on the Balanced Defensive Fund will be reduced from 1.5 percent to 1.4 percent.
The Balanced Defensive, Strategic Income and Capital Plus funds are the biggest funds in their sub-categories, with assets under management of R39.5 billion, R23.5 billion and R23.5 billion respectively at the end of July, according to ProfileData. The Balanced Plus is the second-most popular multi-asset high-equity fund in South Africa, with assets of R83.5 billion.
Coronation will remove performance fees from three offshore funds, as well as the rand-denominated funds that feed into them: the Global Opportunities Equity Fund, the Global Managed Fund and the Global Capital Plus Fund. However, the annual management fees of the Global Managed and Global Capital Plus funds will be increased by 0.15 percent.
The Global Managed and the Global Capital Plus funds are both multi-asset funds. Coronation will continue to charge performance fees on its offshore equity funds.
If a fixed fee instead of a performance fee had applied to the Capital Plus, Global Capital Plus and Global Managed funds over the five years to June 30, investors, on average, would have paid 0.3 percent (excluding VAT) a year less in fees, Pieter Koekemoer, the head of personal investments at Coronation, says. With the Global Opportunities Equity Fund, the reduction would have been 0.1 percent (excluding VAT) a year.
Although Coronation’s South African multi-asset funds will not charge investors performance fees, the funds will not qualify to be included in a tax-free savings account, because they have exposure to offshore funds that do charge performance fees. However, the Global Managed and Global Capital Plus funds, in which all the underlying investments are managed directly by Coronation, will qualify to be included in tax-free accounts.
Personal Finance asked Koekemoer whether Coronation’s decision to remove performance fees on its local multi-asset funds was influenced by National Treasury’s recent draft regulations which, if implemented in their current form, will require all retirement funds to have a default investment strategy that does not include performance fees.
Koekemoer says Coronation “remains of the view that performance-based fees are not inherently inappropriate” for retail funds and “will continue to defend appropriate performance fees”. He says: “The fundamental reason for the changes is to make our fee structures simpler and more consistent across our fund range.”
Koekemoer denies the fee changes were influenced by the growth in lower-cost index-tracking investments.
He says that, in the quarter to June, more than 90 percent of the net flows into collective investment scheme funds were in favour of actively managed funds. This is partly due to the challenges in building robust passive portfolios in a small, concentrated market with sub-optimal industry diversification, as well as investors’ strong preference for multi-asset funds.
Passive investing will become more competitive in the equity-only market but less so in the multi-asset market, “where the ability to exercise continuous judgment about the optimal asset allocation is not as easy to replicate passively”, Koekemoer says.
Coronation will continue to charge performance fees on its two South African equity general funds, the Equity Fund and the Top 20 Fund, which is the second-largest fund in its sub-category, with assets of R21.9 billion at the end of July. In the case of the Equity Fund, Coronation’s share of any out-performance (the sharing rate) will increase from 15 percent to 20 percent, but the cap on the performance fee will be lowered from 1.9 percent to 1.5 percent.
In order to standardise the way in which Coronation charges performance fees across its funds, the Global Emerging Markets, Global Equity Select and Optimum Growth funds will have to out-perform their benchmarks (net of fees) over a rolling two-year period before a performance fee can be levied. The sharing rate of the Optimum Growth Fund will increase from 15 percent to 20 percent, to ensure consistency across all funds where performance fees apply. The annual management fee of the Global Emerging Markets Fund will fall from 1.35 percent to 1.25 percent, and the performance caps on the three funds will be reduced.
Coronation discounts the annual management fees of some of its funds if they under-perform their benchmarks for a certain period. The period over which the fund must under-perform before the discount applies will be increased from a rolling two-year period to a rolling five-year period in the case of the Top 20 Fund. In the case of the Capital Plus and the Global Capital Plus funds, the rolling period will be increased from one to two years. In the case of the Global Capital Plus Fund, the discount has been increased from 0.6 to 0.65 percent.
Koekemoer says that Coronation has retained discounts for negative performance in its income-and-growth funds, where investors – often retirees – require reasonable growth over time coupled with income preservation over the short term. However, discounts are less relevant on funds for investors who require immediate income. “These funds already have highly constrained risk budgets, making capital losses over one year less likely.” Therefore, the fee structure of the Global Strategic Income Fund will be aligned with that of its South African multi-asset income counterpart, the Strategic Income Fund.
Asked whether it was not to the disadvantage of investors to increase the period over which a fund must under-perform before the discounted fee applies, Koekemoer says that investing for the long term is a core tenet of Coronation’s investment philosophy. “We therefore ask clients to be patient and commit for a meaningful period in expectation of achieving better results.”
The discount is based on a fund’s overall performance history. All investors, regardless of their investment period, benefit from the discount accrued in the daily price if the fund under-performs for a specific period. If you invested for, say, two years, the effective fee will equal the sum of the daily fee accruals over that period. If the fund, for example, under-performed for six months over the previous rolling five-year period, you would benefit from the discount for 25 percent of your investment period regardless of whether your specific performance experience was ahead of or behind the benchmark.
Discounted annual fees for under-performance over rolling five-year periods will be introduced for the Equity Fund (0.7 percent), the Global Emerging Markets Fund (1.1 percent), the Global Equity Select Fund (0.9 percent) and the Optimum Growth Fund (1.15 percent).
Coronation will scrap the 0.5-percent discount on the Global Strategic Income Fund if it under-performs over one year. However, the base fee will be reduced from 0.95 percent to 0.85 percent.
Note that all fees quoted in this article exclude VAT and apply to retail funds. Fees may be lower if the same fund is bought on an investment platform.
The new fees take effect from October 1. Coronation will apply the lower of the existing or the new fee structure on a daily basis for the first 12 months from the date of implementation.
FUNDS’ MANDATES TO CHANGE
Coronation proposes to change the investment mandates of its Top 20 and Equity funds.
The Top 20 Fund may invest in up to 20 of the 50 largest companies (by market capitalisation) listed on the JSE. Coronation is proposing that the fund should be allowed to select its holdings (retaining the 20-share limit) from all the shares on the JSE.
Pieter Koekemoer, the head of personal investments at Coronation, says the 50-stock limit unnecessarily constrains the fund’s ability to invest where Coronation sees most value.
When the Top 20 Fund was launched in 2000, the regulator insisted on a clear differentiation between it and the Equity Fund (launched in 1996), which led to this limitation. “As the two funds are now very clearly differentiated, due to their different concentration levels and investment universes, the additional formal restriction has become less relevant,” Koekemoer says.
If the Top 20 Fund’s investment mandate is changed, its benchmark will also change, from the FTSE/JSE Top 40 Index to the FTSE/JSE Capped All Share Index (Capi). Like the All Share Index, the Capi represents the performance of all shares listed on the JSE, but it caps the weighting of any individual share at 10 percent. Coronation says this prevents any single share from becoming too significant in the benchmark.
Investors will be balloted on the change to the Top 20 Fund’s mandate and benchmark.
The Equity Fund is currently restricted to investing in shares listed on the JSE. Coronation proposes that the fund be allowed to invest up to 25 percent in foreign equities, plus a further five percent in equities listed on stock exchanges in Africa excluding South Africa.
“Adding international exposure is consistent with our view that global equity markets will out-perform the local equity market over the next several years.”
Koekemoer says that Coronation will launch an SA Equity Fund for investors who want to invest only in South African equities. The intended launch date is October 1, subject to regulatory approval. The SA Equity Fund will have the same fee structure as the Equity Fund, and its benchmark will be the Capi.
The benchmark of the Equity Fund will change once it starts to invest in foreign shares. Its current benchmark is the FTSE/JSE Shareholders Weighted Index (Swix), which excludes the offshore shareholdings of dual-listed companies. Coronation says the Swix distorts the importance of the dual-listed shares. It proposes a change to a composite of 87.5 percent of the Capi and 12.5 percent of the MSCI All Country World Index.