Page 50 - Profiles's Unit Trusts & Collective Investments - September 2024

CHAPTER 2

Professional Management
Not many investors in South Africa have the time, resources and aptitude necessary to monitor
their own portfolios. Investors in collective investment schemes therefore entrust this task to
professional fund managers employed by management companies, who generally charge between
0.4% and 1.15% of the assets under management, per annum, for their management services.
Annual fees tend to be less for income, bond and index funds, and relatively more for equity-based
funds. Multi-manager funds tend to be the most expensive. Some CISs charge performance-based
fees – the fees levied are dependent on the performance of the fund relative to specified benchmarks.
Competitive Cost Structures
Compared to most investment products, unit trusts and other collective investment schemes
have very competitive fee structures, and when it comes to cost rankings, unit trusts usually beat
all other products.
Having said this, when it comes to fees, deregulation has created a complex environment where
costs vary depending on the amount and the investment channel. Investors and advisors have to
pay attention to ensure they understand all the cost implications of different alternatives.
Fees are quoted under a variety of names, such as initial fees, annual management fees, and
advisor fees (commissions). These are explained more fully in Chapter 3. The ongoing fees of
collective investments (see EAC, Effective Annual Costs) are generally lower than those of
retirement products, insurance-linked investment policies and structured products. Transparency
and competition in the collective investments industry have had enormous benefits for investors.
The lowest cost funds in South Africa have total investment costs (ie, total charged to investors) of
under 0.1% per annum, a tenth of what they were two decades ago.
There are various ways of investing in collective investment schemes, each with different pros
and cons, each with different associated costs. Competition has steadily reduced costs for
investors. In recent years, for example, most management companies have reduced initial charges
to zero for direct investments (eg, via an online interface) while initial charges (commissions) still
apply if one uses a financial advisor. Others have eliminated initial charges and rely on the investor
and financial advisor to negotiate an advice fee. LISPs (investment platforms) represent an
alternative channel where investors can often elect whether to pay broker commission for advice as
an initial charge or a smaller ongoing trailer fee. (Note this would be in addition to the platform
administration fees and underlying fund fees.)
Very few funds still impose initial fees; where they do they range from 0.4% to 3.45% (on
specialist equity funds). Initial fees may be applied to pay a fee to an advisor but this is also
becoming less common. Even where these are imposed, unit trusts compare favourably to other
“institutionalised” saving options. Although 3.45% is up to three or four times the cost of buying
shares through a stockbroker, it is less than half the entry costs of products like endowment
policies and life assurance, where total entry costs are often as much as 7%.
Another advantage of unit trusts is that charges are fully disclosed. This level of transparency
has not existed historically in the life assurance industry, and it is common for a buyer of an
endowment policy not to know exactly how much of the amounts invested are actually being
invested, and how much is going towards costs. The publication of the effective annual costs
(EAC) by most life insurance companies has improved cost disclosure.
Convenience and Liquidity
Collective investments are easy to buy and easy to sell. Investors have the choice of buying unit
trusts through an investment platform, through a financial adviser, through a bank, or directly
from the unit trust management company. Debit orders can be cancelled, increased or decreased
without penalty, unlike traditional assurance products. It is easy for investors to change their asset
allocation as their personal circumstances change – they can switch from equity-based investments
to fixed-interest investments as required – and several services make it easy to manage a small
portfolio of unit trusts. Most importantly, managers or management companies are obliged to
repurchase participatory interests on demand, making collective investments highly liquid.

48 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts