Be aware of costs when you invest – scrutinise Total Expense Ratios above 2% When you make an investment, you need to be aware of everything that could negatively influence your potential return, including the cost of investing. It’s essential to remember that price is an important factor, but is only one part of any decision. What is as important is the value that you get for the price you pay. John Kinsley, MD of Prudential Portfolio Managers Unit Trusts, says that while cost does influence an investor’s ‘after cost’ return, it is important to understand what kinds of costs to expect and what cost parameters are considered fair. “Investors should speak to their financial adviser about investment costs when they make an investment decision, but it is very important that the conversation is about value for money to ensure that they make the best long-term decisions in line with their long-term goals.” Kinsley explains that if an investor takes into account the three different services they are potentially paying fees for – adviser, investment manager and platform fees - ideally the investor should not pay a total of more than between 1.5 and 2%. If the costs are higher, it becomes progressively more difficult to absorb that fee over time. Costs that individual investors can expect to pay In general, an investor should expect to pay a fee for the different professional services they receive. These could include: · financial adviser fees for financial advice and investment support, · an investment management fee for investment management, and · if you invest via a linked investment services provider (also known as a fund platform or LISP) that aggregates your investments and provides you with consolidated statements, you may need to pay an administration or platform fee for their services. Initial fees Initial fees form part of the financial adviser fee and are deducted from the initial investment amount before the money is invested. This fee is agreed with the financial adviser at the time the investment is made. Ongoing annual investment management fee The annual management fee includes both the fee payable to the financial adviser and to the investment management company. “Prudential believes the adviser plays a critical role in agreeing your long-term financial goals with you, not just in matching you to a financial product from time to time. If, however, you decide that you prefer to invest without the guidance and support of an adviser, Prudential takes on the additional operational servicing and support function that the financial adviser would normally provide,” explains Kinsley. Comparing fees using Total Expense Ratios You can evaluate costs using Total Expense Ratios (TERs) in absolute or relative terms. In absolute terms, the investor should investigate whether a TER is high or low, and in relative terms, compare the TER of similar funds. “In absolute terms, a low TER is below 1% a year, particularly in an equity or any multi-asset class fund. If it is between 1 and 2%, it is acceptable. If it is above 2%, warning bells should start ringing. If it’s above 2%, that manager would need to produce quite significant excess return, or alpha, to absorb those fees,” explains Kinsley. “That’s not to say that if a TER is above 2% it is definitely a bad fund, it just means that one would need to scrutinise it quite carefully, looking at the fund’s track record to see whether the high TER is justified,” he adds. Comparing costs using fixed fee products versus performance fee products If you are investing in a unit trust, the TER will show all the ongoing fees associated with that unit trust and is the best and most comparable way of encapsulating the cost of investing via that fund. “If a high TER fund has provided phenomenal returns, you may find that your net returns are better than the fund with a low TER. So don’t just compare high and low. You need to interrogate the TER versus the return profile of the fund,” says Kinsley. If there is a performance fee, it needs to align the interests of the manager with the interests of the investor. “I can see a place for a performance fee in an equity type fund that is aimed at outperforming the market, but I think as soon as you get into target return-type funds, or funds that try to beat inflation, it becomes a little bit less clear that performance fees are in the interest of the investor,” adds Kinsley. ENDS About Prudential Portfolio Managers (South Africa) [Pty] Ltd Prudential Portfolio Managers South Africa (“Prudential”) is a retail and institutional asset management business, with its head office in Cape Town. Prudential also has offices in Windhoek, Johannesburg, Durban and Port Elizabeth. The business has an asset base of approximately 50% South African retail clients, 48% South African pension funds and medical aid schemes, with the remaining 2% being assets manages on behalf of the Prudential offices in the UK and Asia. Prudential South Africa was established in 1994 and has over ZAR100 billion in assets under management (as at 31 December 2010). Prudential South Africa is 47.2% owned by M&G Investments, which in turn is a wholly-owned subsidiary of Prudential Plc. 31.3% of ownership of the South African company vests in a staff trust benefiting the employees of Prudential and a further 21.5% of the business is owned by the Thesele Group, a BEE consortium. Prudential South Africa is an A-rated empowerment company, and is an authorised Discretionary Financial Services Provider in terms of the FAIS Act, 2002.
Posted on: Thu, 27 Jun 2013 05:36:29 +0000
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