If want to pay the lowest fees and earn the best returns in a Fundisa unit trust fund, which you’d use to save for a child’s education, there’s no question about which of the three funds should be your first choice: the Nedgroup Investments Fundisa Fund.
The two other funds are the Absa Fundisa Fund and the Standard Bank Fundisa Fund, managed by Stanlib.
However, subsequent to Personal Finance asking Stanlib and Absa to explain why their fees are so much higher than Nedgroup’s, Stanlib has announced that it will reduce its annual fee.
The Absa and Standard Bank funds had TERs of 1.66 percent and 1.62 percent respectively, whereas Nedgroup’s Fundisa Fund had a TER of only 0.1 percent for the quarter to the end of June, according to figures provided by ProfileData (see “What a TER tells you”, below).
Both Absa and Stanlib charge an annual fee of 1.43 percent (including VAT), whereas Nedgroup has no annual fee.
According to the Association for Savings & Investment SA, 1.43 percent (including VAT) is the maximum annual fee that may be charged on a Fundisa fund. A maximum initial adviser’s fee of 3.42 percent (including VAT) can also be charged, if you go through a financial adviser.
The Nedgroup Fundisa Fund returned 7.16 percent a year over the three years to the end of June, according ProfileData. Stanlib’s fund returned 5.79 percent a year and Absa’s fund returned 5.31 percent a year over the same period. Over five years, the annualised returns on the three Fundisa funds were: Nedgroup, 7.86 percent; Stanlib, 6.49 percent; and Absa, 5.96 percent. The inflation rate in June, as measured by the Consumer Price Index, was 6.6 percent.
Mr CS, of George in the Western Cape, told Personal Finance that he started to invest in the Standard Bank Fundisa Fund in 2010, a year before the birth of his first child. But in 2012 he switched to the Nedgroup Fundisa Fund after he found that, while he was paying Stanlib an annual fee of “about 1.5 percent”, there was no annual fee on the Nedgroup fund.
Mr CS questioned the morality of charging such a high fee on a fund that was established to encourage low-income earners to save for the long term. He called on Stanlib to scrap the fees on its Fundisa fund – “do it for Madiba and South Africa”.
In response, Anthony Katakuzinos, the chief operating officer of Stanlib Retail, told Personal Finance that the fees enabled Stanlib only to break even in covering the fund’s operating costs. For about four to five years, Stanlib had run the fund at a loss. He also said that Stanlib would review the fees.
This week, Katakuzinos said Stanlib is “in the process of reducing our fees to make them more competitive for our customers”. From October 1, the annual fee will be 0.5 percent.
Stanlib’s fund is the biggest of the three, with about R101 million in assets under management.
Matthew de Wet, the head of investments at Nedgroup Investments, says Nedgroup runs its Fundisa fund at a loss. The fund size is R44 million.
“Apart from not taking any fees, we subsidise the custodian charges and bank charges, so there are zero costs in the fund. The auditors kindly do their bit by not charging,” De Wet says.
Nedgroup Investments regards the fund as part of its social responsibility commitment, he says.
Sylvester Kgatla, the head of product development at Absa Wealth and Investment Management, says Absa is running its Fundisa fund at a loss to Absa, despite the annual fee of 1.43 percent. The uptake on the fund has been low: the fund size is less than R11 million.
The Fundisa funds, which are a joint venture between the government and the financial services industry, reward investors who save for tertiary education through the payment of annual bonuses.
In addition to the returns earned in the fund, a bonus of 25 percent of your contributions, up to R600 per beneficiary, is added to your investment each year. You need to invest at least R200 a month, or R2 400 a year, to earn the bonus of R600.
There is no limit on the number of investors who may save on behalf of a single beneficiary, but the maximum annual bonus is R600 a beneficiary.
Since March 1, 2013, to receive the bonuses, the beneficiary of the savings in a Fundisa fund must be from a household with an annual income of not more than R180 000 a year (R15 000 a month). However, a person with a higher annual household income can invest on behalf of a recipient who passes the means test. The means test does not apply to families of learners who opened an account before March 1, 2013; the annual bonus payments will continue to be paid to these investors.
Peter Hewett, the founder of Efficient Advise and the 2014 Financial Planner of Year, says that not only is the Nedgroup fund the cheapest of the three, but, since inception, it has also consistently out-performed its peers and the funds’ benchmark, the BEASSA 1 to 3 Year Index.
The Nedgroup fund has performed well relative to all the other funds in the South African interest-bearing short-term sub-category. It was ranked the top fund over five and three years, and was the third-best fund over one year, according to ProfileData’s returns to June 30.
“The Nedgroup fund has shown a moderate level of volatility compared with the other Fundisa funds and a slightly higher level than the benchmark average – well within a reasonable range for this type of fund,” Hewett says.
He says the annual bonus will have a significant long-term impact on the growth of your investment. “There are no funds in this category that currently out-perform the Nedgroup fund over the longer term and, together with the bonus enhancement, it is an excellent investment option for the lower-income market,” Hewett says.
Katakuzinos says the effect of the annual bonus should not be overlooked when evaluating the merits of investing in a Fundisa fund. Over five years, the bonus can mean that investors earn a return of about 11 percent a year over that period.
What a TER tells you
The total expense ratio (TER) is the total of a fund’s expenses and fees expressed as a percentage of the daily average value of the portfolio calculated over a certain period, usually a financial year. The TER shows the percentage of the portfolio value that is “used up” in fees, operating costs (for example, audit costs and bank charges) and taxes (such as VAT). The TER includes the annual management fee and performance fee (if the fund has one), but excludes any initial costs. The difference between the TER and the annual management fee provides you with an idea of the operating cost-efficiency of the fund. For example, if a fund has a TER of 2.5 percent and an annual fee of 1.5 percent, it means that one percent of the fund’s value was eroded by operating costs.