Page 63 - Profiles's Unit Trusts & Collective Investments - September 2024

Costs and Pricing

Cost Layers
TER figures include cost layers below the reporting fund. A fund of funds (FoF), in other
words, reflects its own costs in its TER plus those of the underlying investments
(proportional to the holdings in each underlying asset). If a FoF with an annual fee of 1.5%,
for example, holds underlying investments that also have annual fees of 1.5%, the annual
fee component of the TER will be 3% rather than 1.5%.

The TC ratio includes brokerage (including VAT), securities transfer tax (STT), investor
protection levies, STRATE contract fees, foreign exchange spread costs, bond spread costs, and
contract for difference costs.
Where transaction costs are capitalised in the trading price (as is the case with bonds, CFDs
and certain forex instruments), the fund manager must make estimates based on fair principles
and include such estimates in the TC calculation.
In summary, since January 2016:
The TER does not include entry costs
The TER does include annual fees and performance fees and other portfolio charges
Transaction costs are quantified separately in the new TC ratio
Performance Fees
Performance fees are included in the TER. However, to enable investors to determine the
extent of performance fees (which may vary considerably over time), the fund manager must
disclose the performance fee for the period as a percentage of the fund.
So, for example, if a fund which charges a performance fee discloses a TER of 3.5%, an annual
service fee of 1.5% and a performance fee of 1.2%, we know that 0.8% of portfolio value
(on average) was expended in operating costs.
Technical Details
Technically, the TER is the total of expenses and fees expressed as a percentage of the daily
average value of the portfolio calculated over a period of usually a financial year. Taxes (like VAT
and stamp duty) are included in the TER.
According to the ASISA standard, both the TER and the TC must be calculated over three-year
rolling periods to coincide with quarter-ends. Quarterly fact sheets, in other words, must reflect the
average annual expenses over the last 36 months. Where there is insufficient data (eg, the fund is
less than three years old), the manager must annualise the available data – except for funds younger
than one year, where the manager must make estimates grounded on fair principles.
TERs are reported by unit class, but operating costs are nearly always charged to the portfolio
as a whole. Managers are therefore required to apportion the operating costs by unit class based on
the proportion of the fund held in each unit class. The annual service fees (and actual performance
fees charged, where applicable) for each unit class are then added to the apportioned operating
costs for each class to establish the total costs for each class.
Multi-tier funds (such as funds of funds) must also report TERs, but they can obviously only do
this once the TERs of the underlying funds are available. Funds of funds are therefore given an
extra month to do the calculation. Fund managers are also required to advise investors if they
become aware of some event or situation which is likely to cause the TER (excluding performance
fees) to change materially.
Other Cost Indicators
While TERs have improved transparency around costs in the unit trust industry, the FSCA has
pushed for an even more inclusive TCO (Total Cost of Ownership) measure that can be applied
across a range of product types. The Effective Annual Costs measure (EAC), announced by ASISA
in 2016, goes some way to answering the FSCA’s call.
A TCO calculation seeks to quantify all the costs associated with a product, including the costs
of acquisition (such as initial charges, which are excluded from TERs), the ongoing costs, and exit
charges (such as early termination penalties for defined period products) where applicable.

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