Page 55 - Profile's Unit Trusts & Collective Investments - March 2025

Costs and Pricing

These numbers put costs into perspective. The JSE Top 40 real return (return after inflation) of
0.41% quoted above was before annual fees. After all costs, an equity fund matching the return of the
indexbut with costsofmorethan0.5%was losing money in real terms. To put it another way, if the
rate of return in a portfolio before costs is 10% per year and the fund’s TER is 2% it means that a fifth
of the investment performance is sacrificed to fees and charges every year. Because most fees remain
the same regardless of market performance, this situation only gets worse when rates of return fall.
At a TER of 2% and returns of 4% per year, half of the portfolio performance is absorbed by costs.
Thankfully the three-year period described above is not indicative of longer-term returns in the
local equity market. Real rates-of-return look much better to the end of July 2023 – 16.74% p.a. for
the Satrix 40 ETF vs inflation of 6.9%. Over 10 years to end of July 2023 the real rate of return on
the Satrix 40 ETF was 5.13% p.a.
Annual costs are not the only issue. Entry costs such as initial charges or upfront fees or
commissions paid to financial advisers also have an impact. Very few managers, platforms and
independent financial advisers charge initial fees. Initial fees and commissions are still used by tied
agents and particularly on investment products sold to lower-income earners.
When an initial fee is charge, the impact can be significant. At an upfront fee of 3.45%,
investors pay away R3 450 for every R100 000 invested. In a fund achieving 10% per annum, this
turns into over R23 000 over 20 years. It might be argued that this is not a significant difference
given the total return at the same rate on R96 550 (the capital invested after payment of the
upfront fee), which is almost R650 000, and that 3.45% is a small price to pay to get the correct
advice, but the fact remains that R23 000 is not an insignificant amount. It highlights the fact that
fees must be evaluated against the quality of advice given. There is no point, as an investor, in
saving on costs but ending up in a mediocre fund. On the other hand, there is no value in paying
advice fees only to end up in an expensive active fund which underperforms passive funds.

Transactions
Conceptually, the calculation of a price on a daily basis for each participatory interest in a CIS is
straightforward: the market value of the portfolio is calculated, and this is divided by the number
of units in issue.
From the point of view of the management company, things are slightly more complicated.
For a start, market values may need to be obtained from a number of different markets, both in
South Africa and overseas. Once an accurate portfolio valuation is in place, the pricing department
also deals with:
Accrual of all interest and dividends due to the portfolio
Distribution of interest and dividends when applicable
Any liabilities against the fund (such as service fees, accrued audit fees, trustee fees, and so on)
In a large management company, the administration department will provide the
pricing department with the number of units in issue at the close of trade, taking into
account the sales of units, repurchases of units, and
Real Returns any switches that have taken place.
The final price of each participatory interest,
Real returns can be defined as net
investment returns achieved after inflation. If known as the net asset value price, can now be
inflation was 4% over the year and a portfolio calculated by dividing the net portfolio value by the
achieved 6% growth, the real return was 2%. number of units. This is the price published in the
Rates of return before inflation are called daily and weekly newspapers, and is also the price at
nominal returns. which units are repurchased.
Purchase and Repurchase
Most SA unit trusts repurchase units at the NAV price without any deductions. This makes it easy
for an investor to calculate the total value of an investment in a unit trust by looking up the NAV price in
the daily newspaper or on the fund’s website.
To give a simple example, if an investor holds 1253 units in a unit trust, and the published
price for the fund is 357.12, the investor’s holding is worth R4 474.71.

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 53