Page 56 - Profile's Unit Trusts & Collective Investments - March 2026

Chapter 3 Costs and pricing

Performance fees typically reward fund managers for outperforming a specified target or
benchmark, often referred to as the fee hurdle. Often the annual fee structure for funds with
performance fees will stipulate a minimum and maximum, the first being the annual fee payable in
the case of underperformance, the latter the cap on the annual fee in the case of outperformance.
The minimum fee may also be referred to as a base fee or fixed fee. Obviously, the most important
factor is an appropriate benchmark – a low performance target favours the fund manager and
disadvantages the investor.
Whether performance fees are beneficial from an investor’s point of view often depends on the
actual day-to-day calculation of these fees. The most popular calculation method applies a rolling
benchmark over a defined period (such as two years). When fund performance is above the fee
hurdle, the fund manager captures a defined portion of the outperformance up to the maximum
fee permitted. If this is calculated daily, the performance fee is charged as long as the fund’s
two-year performance exceeds the fee hurdle. Given a fee hurdle of, say, the benchmark less 10%,
performance fees will apply most of the time.
A more stringent calculation methodology, used by a small minority of those funds that
apply performance fees, employs as the fee hurdle a high watermark (ie, the highest level of
outperformance at which fees were previously collected). This system requires the fund to recoup
any underperformance that occurs after fee collection before more performance fees can be levied.
As the ASISA guidelines on performance fees point out, good performance fees should align the
interests of investors and fund managers. Advisers and investors should ask the following questions
when considering performance fees:
R Is the benchmark appropriate? A fee hurdle based on an undemanding benchmark may
mean unwarranted fees for the manager. CPI as performance benchmark for an equity fund,
for example, would be inappropriate, as would a straight index rather than a total return index
(TRI) for a dividend fund.
R Is the fee hurdle appropriate? A target that is too low (eg, benchmark less 30%) rewards the
fund manager for pedestrian performance, whereas a benchmark that is too high can cause
the manager to take undue risks.
R Is a high watermark applied? If not, make sure that the basis on which rolling periods are
measured is fair.
R Is the rolling period appropriate? An overly long time frame often prejudices new investors
(who end up paying fees related to historical performance from which they haven’t benefitted)
and sees exiting investors escaping performance fees, whereas an overly short time frame
can cause the fund manager to follow riskier short-term strategies.
R Are the fees capped? Where no maximum fee is stipulated performance fees can rob
investors of a significant portion of their return.
In August 2015 the ASISA board approved a Performance Fee Standard which became effective
for ASISA members in January 2017. The 11-page document, available on the ASISA website,
seeks to guide the actions of managers to ensure acceptable practices in the levying of performance
fees. The standard aims to embed the principles of fairness, consistency, transparency, accuracy,
completeness and appropriateness in the design, calculation and disclosure of performance fees.
Portfolio charges
Portfolio charges refer to certain costs incurred in securities trading and administration which
managers may levy directly against the fund.
Up until 2002, all equity-based unit trust funds levied so-called “compulsory charges”, which
usually amounted to about 0.7% of the amount invested. (Tracker funds charged the same level of
compulsory charges, as the brokerage costs for buying underlying shares were typically the same as
for actively managed funds.) This charge was designed to cover the costs to the fund of purchasing
securities.
These costs consist of:
R Securities transfer tax (STT): 0.25% of the value of share purchases (not sales).

54 Profile’s Unit Trusts & Collective Investments March 2026