Page 67 - Profiles's Unit Trusts & Collective Investments - September 2024

Costs and Pricing

Knowing your ABCs
Historically, unit classes have followed tacit rules: A for retails funds, B and C for
institutional funds, and so on. It’s important to note that these “rules”are not an industry
requirement – managers can in fact use any letters or numbers to differentiate unit classes.
(The only exception is R, which denotes a regulated class and identifies fund classes
established before June 1998.) Exercise caution, therefore, before drawing conclusions about retail
and institutional classes based on alpha codes.

The intersection of these factors means that trailer fees are usually the better choice over
shorter periods but initial charges may produce better performance at the end of longer investment
periods. Chart 3.6 shows the investment horizon required in order for an initial fee to outperform
a trailer fee. In other words, if an investor chose to pay 3.45% upfront rather than 0.5% per annum
(ie, pay 3.45% at the start but pay no trailer fee thereafter), the investor would have to hold the
investment for at least seven years and nine months (all other things being equal) to get an
advantage from taking the upfront hit. Or to put it another way, for an investment term of less than
seven years and nine months, the investor would be better off taking the 0.5% per annum trailer
fee rather than the 3.45% initial charge.
Unit Classes

While looking at pricing, it must be noted that a collective investment scheme can have
different classes of participatory interests. Looking at this from the point of view of unit trusts,
these are usually known as A, R, B and C classes, although a fund is not restricted to these classes,
and can create others.
Different classes of units arise where a manager wants to apply different charges to different
types of investors in the same fund.

Institutional and Clean Classes
B and C unit classes (amongst other letters) are generally based on fee structures applicable to
institutions and other wholesales clients, such as LISPs and investment platforms.
The “institutional” classes typically offer discounted fees. For example, a fund that charges retail
investors a 1.14% annual fee (via the A unit class) may charge an investment platform only 0.68%
via a B unit class.
Although unit trust annual fees are often thought of as investment management fees, the
charges levied by the manager may contain other elements. Many annual fees actually consist of an
investment management portion and an administration portion, for example. The admin portion
may be paid as a rebate to a LISP or investment platform by the manager because the LISP is
relieving the manager of a large part of the administrative burden (the LISP puts through bulk
transactions, meaning the manager does not have to deal with many individual investors).
A “clean class” does not contain any rebates paid to a platform or LISP. From an investor’s
point-of-view, the disclosed fees of a clean class transparently reflect what is being paid to the asset
manager, the administrator and the advisor without disguising payments between the three service
providers.
A and R Classes
In terms of changes approved by the FSCA which came into effect on 1 April 2000, unit trusts
were permitted to apply different fees to different investors in the same fund. Some management
companies introduced up to four tiers of charges.
Deregulation of charges was in fact first implemented in June 1998. New funds created after
June 1998 were given permission to set their own fees (ie, they were not limited by the Unit Trusts
Control Act), and they were free to vary fees provided they notified unitholders.
Existing funds, however, were only permitted to change their fees if they obtained the approval
of unitholders. Existing funds lobbied for the same flexibility as new funds (ie, the freedom to vary

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