Page 62 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 3 Costs and pricing

Total expense ratios
As discussed under “portfolio charges”, CISCA allows fund managers to recover various costs
directly from the portfolio. The total expense ratio (TER), a cost measure which must be published
by ASISA members, helps investors understand the extent of these costs.
Before the TER was introduced, the effect of expenses charged directly to each fund was not
that visible to investors because they were only disclosed in the annual reports of the funds,
which require analysis and were not always readily available.
Since April 2007 ASISA members have been required to quantify their “direct costs” by way of a
ratio which shows these expenses as a percentage of the total assets of the fund. The TER therefore
shows the percentage of portfolio value that was “used up” in fees and operating costs (things like
trading costs, audit fees and bank charges). The TER is designed to capture costs for all layers of
holdings. In other words, the costs of underlying funds, where applicable – and funds held in turn by
those underlying funds, if relevant – must all be reflected in the reporting fund’s TER.
The difference between the TER and the annual service fee percentage gives an idea of the
operating cost-efficiency of the fund. A TER of 2.5% and an annual service fee of 1.5% means that
1% per annum of portfolio value was eroded by operating costs.
TERs are provided quarterly by all member funds. Single-tier funds are required to provide updated
figures within a month of the quarter end, multi-tier (hybrid) funds within six weeks and fund of funds
(FoFs) within two months of the quarter end.
From an interpretation point of view the TER needs to be regarded as an indicative figure rather
than an absolute figure.
The new TER and transaction costs
From January 2016 the TER standard changed to eliminate minor differences in calculation
methodology that were permissible under the old system (mainly, whether trading costs were
included or excluded).
Under the new TER rules (effective from January 2016) transaction costs are excluded from the
TER. However, these are now quantified in a new transaction costs (TC) statistic which all managers
are required to publish on an ongoing basis. Note that the TC is sometimes taken to mean total costs
(which is not correct as per the FSCA definition). To avoid confusion, some managers are quoting
the total investment costs (TICs), which is the sum of the TER and the TC percentages.
Under the new rules, transaction costs are the only exclusion from the TER. The TER includes
management fees, performance, administration costs, custody fees, trustee fees, audit fees, bank
charges, taxes, interest paid, and scrip-lending costs.
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.

TER vs OCF vs EAC
In the UK the TER has been replaced by the ongoing charges figure (OCF). When looking
at overseas funds quoting the OCF, it’s important to note that the figures are not
interchangeable as the calculation methodology differs in some respects. The TER in SA,
for example, includes performance fees and tax charges (where applicable) – both are excluded from
the OCF. Both the OCF and the TER exclude costs associated with transactions (such as brokerage).
The TIC in SA is largely comparable to the UK’s OCF plus performance fees plus trading costs.
The effective annual cost (EAC) attempts to cover all financial products, not just collective investments,
and applies to fixed term funds as well as open-ended funds.
Key differences between the TER and the EAC in SA are:
„ The TER is backward looking, the EAC is forward looking
„ The EAC includes various costs excluded from the TER, such as initial charges, contract penalties
and exit charges

60 Profile’s Unit Trusts & Collective Investments September 2025