Over the years there has been a gradual progression in the required disclosure of fee’s displayed on official marketing documents, such as fund fact sheets and more recently minimum disclosure documents (MDD).
Over the years there has been a gradual progression in the required disclosure of fee’s displayed on official marketing documents, such as fund fact sheets and more recently minimum disclosure documents (MDD). This began with Annual Management Charges (AMC), followed by Total Expense Ratios (TER) and now Total Investment Charge (TIC). NFB has since the inception of the fund of funds always displayed both the AMC and TER and has now expanded this to include transaction costs (TC) – the additional disclosure from TER to TIC. The TIC is the current required effective annual cost (EAC) for collective investment scheme (CIS) managers within the calculation of required total EAC to clients.
NFB Ci Balanced Fund of Funds:
Total Expense Ratio (TER) vs Annual Management Fee (AMF)
- An AMF is the fee a CIS Manager charges for asset management and fund administration. It is expressed as a percentage of the portfolio’s assets under management.
- A TER is comprised of the actual expenses paid out of a fund for the management of the fund and it includes the annual management fee.
- The TER will therefore be higher than the AMF.
- The costs included in the TER calculation are not new; they are disclosed in a portfolio’s financial statement for the relevant financial period.
Expenses included in the TER calculation
Costs incurred in the prudent operation of a fund are included. The costs are deducted from the fund’s assets.
- AMF (including performance fees)
- Fixed operating costs:
- Custody and Trustee fees
- Audit fees
- Bank charges, other than those charged by an investor’s bank
- Value Added Taxes
- Liquidity costs:
- Net negative interest charges (this is applicable in the unlikely event of a fund owing interest to a bank as a result of temporary liquidity pressure)
- For investments in other funds:
- Weighted portion of the underlying portfolio’s TER (for funds of funds)
- Upfront fees
- Exit fees or reduction of redemption
- Where income is earned by the providers of scrip lending services and if this income is not passed back to the portfolio, such an amount that is retained by the provider must be included.
Investor expenses not included in a TER
Costs that are incurred directly by the investor and not the fund itself are not included, such as:
- Costs of entry to an investment, i.e. Initial fees.
- Initial and ongoing costs for financial advice – if applicable.
- Other costs incurred directly by the investor, because of the investment, e.g. bank charges.
- Exit costs.
- Costs that are related to specific products, where these products invest in collective investment schemes, such as some life and LISP products. An example of this would be the cost of a Retirement Annuity which invests in collective investment schemes.
Brokerage and transaction costs
Brokerage and expenses relating to the settlement of transactions and taxes incurred on these items, i.e. VAT on brokerage, UST and stamp duty, do not need to be included in the TER calculation.
This decision was taken:
- To align the CIS industry’s TER to other expense ratios used elsewhere in the world.
- To enable more accurate comparisons of TERs of local funds to TERs of international funds.
- Transaction costs will be incurred regardless of the capacity in which such a purchase is made, e.g. purchasing an equity in a private capacity or for an underlying asset in a portfolio.
Total Investment Cost (TIC) and Transaction Cost (TC)
TIC = TER + TC
TC is a measure that can be used by investors and advisors to determine the costs incurred in buying and selling the underlying assets of a Financial Product. These include the following:
- Securities transfer tax (“STT”);
- Investor protection levy;
- STRATE contract fees;
- FX spread costs;
- Bond spread costs and
- Certificates for Difference (“CFD”) costs.
The major factors which would contribute to a high TC would include high portfolio turnover or expensive trading costs (frequent and/or high brokerage costs and higher STT as a result of more frequent trading); illiquid assets (bond spread costs); illiquid currencies (FX spread costs) and leveraged positions attracting high funding costs (CFD’s). The investor protection levy and STRATE levies are of such a small nature, 0.0002% and 0.005787% on the value of a trade respectively, that these two costs will not make a material impact to the TC of comparable funds.
Effective Annual Cost (EAC)
EACs have been developed in order to operate within the Treating Customers Fairly (TCF) framework, allowing customers to accurately compare investment charges in a meaningful way irrespective of whether the product is a unit trust, a living annuity, a retirement annuity or and an endowment policy.
The standard applies to participatory interests in collective investment schemes (including foreign collective investment schemes duly approved for marketing in South Africa), contracts under a linked investment services provider license, all insurance contracts (other than pure risk-based insurance contracts) and products wrapped in a life wrapper, and memberships of retirement annuity funds and preservation funds.
The EAC comprises four separate components into which various charges are allocated. The components are:
- investment management charges;
- advice charges;
- administration charges; and
- ·other charges.
The value for each of the components, as well as the total EAC, is to be displayed in a table at four mandatory disclosure periods – one; three; five and term to maturity / ten years (no term) / age 55 (retirement product).
(Information sourced directly from ASISA)