Page 54 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 3 Costs and pricing

Chapter 3

Costs and pricing
NQF
Relevant to
The importance of costs 243130: 2
Investors should never be blasé about the costs of investment management and 243135: 1 - 3
administration. The fees paid to asset managers and fund administrators are a direct 243141: 1 - 4
243148: 2
charge against investment performance, and can have a significant impact on returns.
As Figure 3.1 shows, the difference between a low cost fund and a high cost fund,
all other things being equal, is dramatic. In the illustration, the low cost fund produces nearly three
times the return of the high cost fund purely as a result of lower fees. The cost levels are based on
the average total investment costs (TICs) of six of the least expensive and six of the most expensive
rand-denominated fund classes.

Figure 3.1: Effect of annual costs

Calculation based on R1 000 a month invested for 30 years (assuming present value numbers, zero inflation). Excess of fund A over fund B is R47 700
after 10 years, R330 700 after 20 years, and R1.3m after 30 years.
SA is a comparatively high-inflation environment. As a consequence, in times of moderate
investment returns, costs and fees can constitute a significant deduction against potential investment
performance. At the lower end of the spectrum of stock market returns, the level of ongoing costs
can mean the difference between positive and negative real rates of return.
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.

52 Profile’s Unit Trusts & Collective Investments September 2025