The fees you pay investment managers to manage your unit trust investments are slowly decreasing and are likely to continue to do so.
Investors who use investment platforms and advisers have also seen big fee reductions – of about 30 percent over the past 10 years.
An analysis conducted by RMI Investment Managers of net expense ratios on unit trust fund investments over the past 10 years shows reductions of between 17 and 34 percent. The net expense ratio is the cost of both asset management fees and operating expenses such as custodian fees and distribution fees.
RMI’s analysis included both institutional and retail investment fee classes. Institutional investors who invest large amounts of money are usually charged lower management fees than retail investors with smaller amounts to invest.
Jeanette Marais, a director at Allan Gray, expects the fees to reduce even further to around 0.60 percent over the next five years. There is a lot of evidence of managers making changes to their fees. Some of the biggest managers, such as Old Mutual, Sanlam, Investec and Coronation, have recently amended their fees.
Elize Botha, the managing director of Old Mutual Unit Trusts (OMUT), says OMUT changed its fees on its South African equity funds from January this year. OMUT’s local A-class equity funds, which were charging between 0.86 percent and 2.85 percent a year, are now priced at 1.54 percent (including VAT) if you invest directly and 1.14 percent if you invest via an investment platform.
Botha says the main reason for the change was to reduce complexity and introduce a highly competitive, simple fee structure.
Carl Roothman, the head of Sanlam Investments’ retail business, says Sanlam Investments did away with initial fees on its unit trust funds last year. Sangeeth Sewnath, the deputy managing director of Investec Asset Management (IAM), says IAM reduced performance-related fees and fees on certain rand-denominated offshore funds and fixed-income funds in May last year.
Coronation Fund Managers scrapped performance fees where they still existed on its South African multi-asset funds, on three of its offshore funds and on its rand denominated feeder funds. In some cases, the flat fee increased when the performance fee was removed. Last year, the company also changed the way performance fees are charged on its equity-based funds.
Allan Gray says the total cost of asset management fees and adviser fees for a unit trust investment on an investment platform has fallen by about 30 percent over the past 10 years. Marais gives the percentage as 2.2 percent plus VAT in 2015, compared to three percent in 2005.
She says these price reductions happened over the course of one of the strongest bull markets in history, when asset managers were benefiting from the good returns investments earned from the market. Despite the current lower-return environment, she believes investment platform fees will go as low as 0.25 percent in future.
Sewnath agrees that platform fees have almost halved, on average, from 0.75 percentage points to 0.40 percentage points over the last five years, depending on asset size. Anet Ahern, chief executive officer of PSG Asset Management, says there has been a 30 to 50 percent reduction in platform fees over 10 years.
When it comes to adviser fees, Marais says the Allan Gray platform shows that average financial adviser fees reduced from 0.86 percent to 0.83 percent in the decade between 2005 and 2015.
Advisers with clients on the Allan Gray platform are typically independent, while tied agents, who work for the likes of life companies, typically charge more than independent advisers, Marais says.
At PSG, adviser fees are negotiated on an individual basis, Ahern says, but there hasn’t been much change in these fees, which vary from 0.50 percent to one percent depending on the services provided.
Marais believes price reductions will continue and in five years time, the total cost of using an investment platform will be less than two percent a year of your total assets under management.
WHY FEES ARE COMING DOWN
There are a number of reasons why asset management fees are dropping:
1. The move to passive investments
There has been a huge move to low-cost passive or index-tracking investments around the world and this is a big driver of lower costs, Kevin Hinton, the head of retail distribution at RMI Investment Managers (RMI), says.
The move is most marked in markets such as the United States, where, according to Greenwich Associates, the mandates that institutional investors are giving to active fund managers have dropped from 79 percent of all US institutional investments in 2012 to 67 percent in 2015.
Elize Botha, the managing director of Old Mutual Trusts, says the money invested in passive funds in the US is expected to grow from 11 percent currently to 22 percent by 2020. In South Africa, passive investments still account for a small percentage of all investments, but they are growing rapidly.
Anet Ahern, chief executive officer of PSG Asset Management, says fees for local investment products depend on the degree of active management involved. However, she says there seems to be a growing disparity between active and passive management fees as passive management gains scale and becomes cheaper.
2. Increased transparency
Increased transparency about costs is also driving them down, says Ahern. Carl Roothman, the head of Sanlam Investments’ retail business, says fee transparency for unit trust funds is complete and all fees, including transactions costs, are now disclosed.
From October last year, a new measure of costs, the effective annual cost (EAC,) was introduced. As well as providing this, fund managers now provide the total investment charges (the costs of trading).
3. More competition and greater economies of scale
Jeanette Marais, a director at Allan Gray, says there are now more managers and increased competition. Marais says competition, asset managers achieving economies of scale and more clients investing through investment platforms have all contributed to managers reducing their fees. In developed markets, there has also been consolidation of active managers,which has resulted in scale-related reductions in fees.
Marais says managers with a strong brand or reputation can charge a premium, as do managers who limit the size of their equity portfolios in order to avoid diluting returns.
4. Discretionary investment managers
Hinton says the negotiations of discretionary investment managers (DIMS), who construct portfolios for financial advisers, have contributed to the lowering of fees.
He says there are 32 DIMS in South Africa, advising on an estimated R100 to R200 billion of investments in unit trust funds – or between 10 and 20 percent of the total amount invested in South African funds.
DIMS are able to get managers to drop performance fees, he says, especially when they perceive the fees to be unfair – for example, when performance is measured against a performance hurdle that is too low.
5. Clean-class fees
What are known as clean classes of unit trust funds have been introduced on investment platforms where previously fees included the cost of rebates or kickbacks paid to investment platforms for listing funds. These rebates are now used to offer lower fees on investments in clean-priced funds, which Sewnath says are now widely available.
Investing in a clean-price unit trust fund on an investment platform could save you 0.3 to 0.4 percentage points, but you will also pay a platform administration fee.
Marais says none of the investment platforms is truly independent. Every platform in the South African market is connected in some way with an asset manager, life company, bank, wealth manager or a combination thereof.
Asset management, life and wealth management companies regard their investment platforms as strategic distribution channels and are happy to cross-subsidise their costs, she says.
DON'T ONLY LOOK AT FEES
Fees should not be considered in isolation. It may be worth paying more if a manager can deliver better performance, but you need to identify a manager who can consistently deliver better performance before you agree to a higher fee. You should also remember that past performance does not guarantee future performance.
The certainty of paying a lower fee can be worth a lot.
Elize Botha of Old Mutual Unit Trusts says performance fees can result in big differences in fees depending on the performance.
For example, one fund managers’ total expense ratio for a fund available to individuals is 2.36 percent, a significant portion of which is performance fees. She says that is a 0.81 percent difference a year in fees before any performance differentials are taken into account. Over a 20-year period, this can have a 17.5-percent impact on an investors’ final portfolio value.
WHAT YOU COULD PAY
Equity funds (general equity)
Equity funds’ base fees tend to range between 0.45 percent and 0.85 percent, while capped performance fees in this category bring some annual fund fees to 2.85 percent, Anet Ahern, chief executive officer of PSG Asset Management, says. Some performance fees are uncapped. There are a few funds which have over- and under- performance fees.
Balanced funds (multi-asset – high equity)
Ahern says about 50 percent of balanced funds have a flat-fee structure and the rest have a flat fee and a performance fee. She says the base fees in this category range between 0.55 percent and one percent. Some funds in this category have an uncapped performance fee, while the funds that have capped performance fees may have annual fund fees of up to 2.6 percent. There are a few funds that have over- and under-performance fees.
Elize Botha, managing director of Old Mutual Unit Trusts, says nine managers who manage balanced funds representing 84 percent of the assets in this sub-category charge flat fees ranging between 1.25 percent and 1.35 percent a year before VAT for direct retail investors. If you invest via an investment platform, the fees are typically reduced by between 0.3 percent and 0.4 percent a year, although you will also pay an annual platform administration fee.
In the case of funds with performance fees, the flat fees range from a minimum fee of 0.5 percent a year to 1.25 percent a year before the performance fee is added, Botha says. The maximum annual fee, including performance fee, starts at 1.5 percent a year plus VAT and there is no cap on how high some performance fees can go, she says.
Stable funds (multi-asset – low equity)
Funds in this category tend to have a flat-fee structure with base fees ranging between 0.35 percent and 0.95 percent, according to Ahern. Again, a few funds have over- and under-performance fees.
Income funds (multi-asset – income)
Funds in this category usually have a flat-fee structure with no performance fees, Ahern says. These fees range between 0.45 percent and 0.6 percent.