Everything you need to know about collective investment portfolio fees and charge
Trying to determine how much you'll pay to purchase or sell units in a collective investment portfolio may seem quite confusing at first, especially when you are confronted with NAV prices, initial fees, exit fees and just recently, multiple classes of units. This fact sheet will explain the different fees and charges you are likely to encounter as a collective investment portfolio investor. Firstly, a look will be taken at how collective investment portfolio prices are disclosed in the media and any regulatory requirements which may apply. The different fees and charges that are levied by management companies will be explained and to conclude the fees and charges of different fund types differ are explained.
How collective investment portfolio prices are disclosed in the media?
You can determine how much a unit will cost you if you buy a particular collective investment portfolio or how much you will receive should you wish to redeem your units by simply opening up a daily newspaper. All publications will quote one price, the NAV price and the initial fee, expressed as a percentage inclusive of VAT of the amount invested.
NAV price
The NAV price, is the price at which you can buy or sell units. In other words, this is how much you will have to pay to purchase units in a particular fund.
Forward pricing
Unlike share prices which fluctuate throughout the day, collective investment portfolios have a fixed price for the day. With forward pricing, the price is established each evening, using closing prices of investments for the day, and then applied to all the transactions that took place during the same day. This means that all sales, repurchases and creation of new units can only be priced and processed at the end of the day.
De-regulated fees
Collective investment portfolio fees and charges were deregulated on 1 June 1998. Prior to deregulation, collective investment portfolios were not legally allowed to charge more than 1% as an annual management fee and 5% for initial charges. After deregulation, the ceiling on annual fees was removed, meaning that funds launched after deregulation do not have the same restrictions imposed on them. Fees are thus determined by market forces and the actual costs incurred can differ from fund to fund.
Any level or type of fee may be changed, but the management company has to give its unit holders three months written notice of any increase in fees, additional fees or change in calculation of fees and charges.
Following the de-regulation of fees and charges, multiple classes of units were introduced. This allows management companies to identify different types of unit holders and to differentiate between the service offered to different clients and the annual fees they charge. For more information about multiple classes please see our fact sheet entitled "The facts on multiple classes of unit".
Different types of fees and charges
Collective investment portfolio management companies are obliged to disclose all fees and charges to their investors, and these are usually disclosed on all marketing material. Each collective investment portfolio fund has different fees and charges, but these costs can be broadly classified into two categories: once-off entry costs and on-going annual costs.
Initial fees or once-off entry costs
Initial fees are levied when purchasing units, be it an initial lump sum, additional deposit or debit order. Generally speaking the higher the investment amount the lower the initial charge. Initial fees are charged by the management company of which a portion is used to pay broker commission and the remainder covers marketing and administration costs. These fees are deducted from the amount invested and can range between 1% and 5%. However, since deregulation has come into effect, there are no maximum restrictions in terms of initial charges. Some management companies do not charge initial fees at all which is in line with the international "no-load" trend.
VAT on initial charge
Value added tax is levied on the initial charge at a rate of 14%.
Annual fees
This is an ongoing fee levied by the management company for administering the units and managing the investments. Prior to deregulation, these charges had a ceiling of 1%. VAT of 14% is payable on the service fee. These fees are calculated on a daily basis, and are automatically deducted from income distributions on a monthly basis.
Trailer fees
Some management companies pay broker fees out of the annual management fee. These are trailer fees, which are paid to brokers to provide on-going investment advice to their clients.
Switching fees
Fees are levied if an investor switches from one fund to another. Some companies charge a fixed fee for each switch, but most do not charge for switching between funds within the management company.
Exit fees
Some management companies do not levy initial fees or charge a reduced initial fee but levy an exit fee. This is a fee you pay if you sell an investment within a certain period i.e. within the first year, and is based on the original capital as well as growth of the fund.
Performance-based fees
Performance-based fees have recently been introduced to the market. Instead of charging a fixed annual fee of say 1%, annual fees are linked to the performance of the fund. A maximum performance fee will be charged if the fund exceeds a given relevant benchmark, for example the JSE All Share Index, by a certain percentage. Should a fund under perform its benchmark, the annual fees may be waived entirely.
Benchmark return e.g. JSE All Share Index - 5% per annum
20% outperformance of benchmark - 3% per annum (max annual fee)
20% underperformance of benchmark - 0% per annum (min annual fee)
Do fees and charges differ for different fund types?
Equity funds vs. fixed interest funds
Generally, investment charges for equity collective investment portfolio funds are higher than the fees of fixed interest funds such as money market funds and bond funds, because investing in equity markets is riskier and more time consuming from a research perspective, than investing in fixed interest markets.
Although money market funds may require a high initial lump sum (anything from R20 000 to R50 000), no initial charges are levied. In addition, no commission is payable to brokers and no MST tax is levied.
Actively managed funds vs. passively managed funds
Actively managed funds tend to charge higher fees than passively managed funds. Passively managed funds such as index funds follow a chosen index e.g. All Share index (ALSI) with the aim of replicating the stock market's performance. The only risk the investor is exposed to is market risk. The fund manager need not select shares that may outperform the index. In essence no active decision-making is required for these funds and hence they can charge lower fees and charges. Conversely, fund managers of actively managed funds endeavour to outperform a given benchmark through superior stock selection, and a keen understanding of the market. This active management of the fund allows management companies to levy higher fees and charges.
A traditional collective investment portfolio vs. a fund of funds
Funds of funds do have higher fees and charges than traditional collective investment portfolios. A fund of funds is a collective investment portfolio fund that invests in a range of other collective investment portfolios. These could be funds within a management company's own range (internal fund of funds) or a selection of funds managed by various management companies (external fund of funds). In the case of a traditional collective investment portfolio, one layer of fees and charges is payable i.e. an initial charge and an annual fee. With a fund of funds, an additional layer of fees is payable i.e. in addition to the initial fee and annual charges applicable to the fund of funds, the management costs of the underlying funds must be accounted for too. To remain competitive, in-house funds of funds often do not charge the second layer of fees and charges and some management companies absorb the second layer of costs. Investors should check with the management company if and at what level underlying investment costs are payable.
Concluding remarks
It is important to consider fees and charges when selecting an investment product. Just like shopping for any good or service, you need to shop around, compare the initial charges and annual charges of different funds, be aware of any additional costs such as exit fees and switching fees, as they may influence your investment significantly. Beware of investing in too many funds as this increases the cost of investing and can lead to over-diversification.
