From March 1 2019, all service providers to retirement funds, including administrators, advisers and asset managers, have to comply with the full fee disclosure requirements of the Association for Savings & Investment SA Asisa standard on retirement savings cost disclosure.
I always enjoy reading Warren Buffett's annual letter to shareholders as it is full of interesting insights, coming from someone who has the luxury of being able to be completely honest Once again, Buffett used his latest letter to trumpet the effect of fees on the ultimate investment outcome. This time he used the following analogy: if a pension fund had invested $1m in a no fee S&P 500 index fund at the start of his career in 1942, that investment would have grown to about $5.3bn. If the same pension fund had paid fees of only 1% a year its gain would have been cut in half, to $2.65bn. "That's what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate."
His letter comes at an interesting time for SA's retirement fund industry. From March 1 2019, all service providers to retirement funds, including administrators, advisers and asset managers, have to comply with the full fee disclosure requirements of the Association for Savings & Investment SA Asisa standard on retirement savings cost disclosure. The document lists all the possible charges a retirement fund or umbrella fund can be exposed to. There is nowhere to hide. When it comes to investments, all asset managers will be obliged to disclose all the tiers of fees and costs to clients, whether they earn those fees directly, or they are costs incurred in the managing of assets.
The same level of disclosure was made compulsory for all unit trusts in 2016. Unfortunately, most individual investors seldom look at their unit trust monthly fund fact sheets to determine what they pay. Boards of trustees of retirement funds are different. Once presented with a concept, they tend to become dogged about it. The Asisa standard requires two levels of disclosure by asset managers, covering fees and costs. Fees consist of direct management and performance fees, as well as some fairly negligible fees charged by custodians, trustees and banks. These make up the total expense ratio TER. Costs relate to charges incurred in the process of managing a portfolio and include items such as brokerage anything from 0.08% to 0.20% of the value of each equity transaction, securities transfer tax 0.25% of the value of each equity bought , investor protection levies and Strate contract fees negligible numbers.
The Asisa standard also requires disclosure of costs inherent in holding or trading illiquid instruments such as bonds and currencies. All these costs constitute the transaction cost TC. The main factors that would contribute to a high TC would include frequent trading, which attracts brokerage and securities transfer tax such as encountered with hedge funds; high stockbroking costs if the asset manager "pays" the stockbroker for research via stockbroking fees; and large holdings in illiquid bonds and currencies, which reflect in large spread costs.
To date much has been written about minimising management fees when investing. Absolutely nothing has been written about minimising costs. Both have a bearing on performance. Institutional numbers will become available only from March 1. However, looking at unit trusts as a proxy, a general equity unit trust such as the Coronation Equity Fund had a TER of 1.22% and TC of 0.22% over the past year, the Allan Gray Equity Fund had a TER of 2.22% and TC of 0.08%, and the Investec Equity Fund a TER of 1.24% and TC of 0.54%. A large passive fund tracking the FTSE JSE SWIX 40 index would have a TER closer to 0.5% and TC of 0.03%.
When looking at S&P surveys, which clearly show that more than 80% of actively managed equity funds underperform market indices over five years, irrespective of bull or bear markets and irrespective of geographies, very often that underperformance is not so much a function of a poor skill set as of the costs embedded in the product One percent per annum in extra fees and costs amounts to over 5% in lost performance over five years.
Publication: Business Day (Late Final)
Date: Thursday, February 07, 2019
Page: 7