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SA is behind the curve on unit trust fees

Other parts of the world are seeing costs fall more quickly.

Over the last few years there has been a tremendous amount of focus placed on the fees charged on financial products. Across the industry, there has been growing pressure to deliver the most cost-effective solutions to clients.

The investment industry in particular has come under a lot of pressure, with asset managers being forced to re-evaluate the value they are providing for the fee they are charging. Independent research firm Morningstar has even gone so far as to show that fees are the best determinant of future returns – the lower the fee a fund charges, the more likely it is to outperform.

This week Morningstar released its 2019 Global Investor Experience Study on fees and expenses. This biennial report compares and rates unit trust markets across the world, based on the fees investors are paying.

Two years ago, Morningstar rated South Africa as ‘above average’. For 2019, however, the country slipped back into the ‘average’ category.

“It’s not really a case of South Africa getting worse, but more a case of other countries getting better in terms of the fees they are charging,” says Michael Kruger, investment analyst at Morningstar.

Relative costs

Using asset-weighted medians as a measure, the table below shows how fees on South African funds compare to the three most highly rated countries – Australia, the Netherlands and the USA.

Asset weighted median fund costs
  Australia Netherlands US South Africa
  Domiciled Available for sale (AFS) Domiciled AFS Domiciled AFS Domiciled AFS
Balanced 0.9% 0.9% 0.64% 0.97% 0.6% 0.6% 1.6% 1.6%
Equity 1.23% 1.23% 0.5% 0.92% 0.59% 0.59% 1.36% 1.83%
Fixed income 0.6% 0.6% 0.5% 0.57% 0.42% 0.42% 0.85% 0.85%

Source: Morningstar

There are a number of factors in other markets that are pushing fees down more quickly than in South Africa. The most significant is the rapid uptake of low-cost, passive products.

“Globally there has been a big move to passive, particularly in the US, where we have now seen assets under management in passive equity funds overtake those of active,” Kruger explains. “Passive investing in South Africa is still relatively small when compared to the large active managers and hasn’t taken a massive foothold in the market yet.”

Another important factor is regulation in many countries that has either directly or indirectly put pressure on fees. This includes the Retail Distribution Review (RDR) in the UK, and steps taken in the Netherlands that require fund companies to move investors into fund classes that do not pay ongoing fees to advisors.

Increased awareness

Where South Africa is in line with many other jurisdictions is that investors in general are becoming more aware of what they are paying. This is because of increased scrutiny from the media, regulators and government.

“Investors have realised that minimising costs is very important,” Kruger notes. “They are moving into cheaper products, and this has increased the competition between managers. This has forced active managers in particular to bring down their fees in order to compete.”

However, this hasn’t been as pronounced as Kruger would like. This is particularly the case with the large local managers who have enormous scale benefits, but in many cases aren’t passing these on to their clients.

“There is a point where additional assets under management don’t require incremental costs,” Kruger says. “We would expect managers who have significant assets to decrease the fees that they charge and pass this benefit back to investors, but I don’t think that is happening in the South African environment.”

At the moment, the bigger asset managers still enjoy significant brand recognition and stable market shares, and that gives them pricing power. They have therefore not felt the need to reduce their fees to the extent they could have.

The fact that passive investing has also not yet gained significant traction in South Africa also means these asset managers are not facing the same threat from this part of the market as active managers are in other countries.

Performance fee puzzle

The final area where South Africa clearly lags the lower cost markets is the use of performance fees, and particularly where these are asymmetrical – in other words, where the manager earns a higher fee if the fund performs well, but will never earn below a certain level even when the fund underperforms.

“In the US, firms have moved away from charging performance fees because regulation says you have to use a fulcrum fee – that the manager has to participate in the downside,” Kruger says.

Where Morningstar also finds local performance fees problematic is that they are charged on different structures by different managers, and are generally difficult to understand.

“We sit down and try to work out how each of these fees are calculated, and it’s not easy, so it is very difficult for the person in the street to understand what they are paying,” Kruger notes. “Disclosure on performance fees is generally not great from managers either. The way they explain how they work doesn’t do enough to explain how they are calculated and charged.”

There is also the added complication that when performance fees are levied, what the investor is actually paying can change significantly over time.

“Performance fees can change drastically from year to year,” Kruger points out. “We think cost certainty for investors is probably the best thing at the end of the day. When someone looks at their statement and the fee fluctuates drastically from one period to the next, I don’t think that’s in the best interests of end investors.”

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Very good article and an eyeopener of sorts.

In SA the investment industry seems to be on a very good wicket. They know there is a lot of questions around fees these days and many have adjusted fees downwards or has just made it so complicated that the man in the street can not understand it.

My feeling is however that only the asset managers fees are looked at and they then go along and invest your pension money or annuity in their own unit trust funds where you might find the TIC is quite high and the same guy is getting a bit more money from you.

So they charge you for telling you what basket of funds to invest in and then charge you again to manage the basket of funds. Great business. No wonder there are over 1000 funds to choose from.

The slow uptake of passive products in SA is surprising to say the least. The pension industry does not seem to use it as they then would have to forfeit their fund management fees and on the discretionary side it could be that most South Africans are totally offshore already and that the remaining ones either trust and advisor because of limited knowledge or try their hand at stock picking in the hope of beating the market.

More focus and education in this regard will go a long way and this article will hopefully have the desired effect.

Agreed-excellent article. Interesting comment about the slow uptake here in SA of passive products-in the US this is the big seller with some funds at or near zero cost(make their money from script lending). I suspect that a lot of non Reg 28 investment funds are rather being invested offshore by the higher level clients the lower level still investing locally at TERs of 2% +

Dear Fund managers-the days of Clifton and Bishopscourt houses are over(maybe not with luxury property prices collapsing!) unless you deliver results which most of you have not.

Investment management remains ‘a licence to print money’, even the worst managers who should have gone out of business years ago in a competitive environment do very well at the expense of their clients.

Performance fees? Biggest load of nonsense sold to investors over decades. It’s simple, grow my money and your fee grows – there’s your performance fee. Additional performance fees (which you cannot reliably attribute to your effort or the market) are simply a method to gouge investors.

Sadly in a cartel type environment, its better to join the fee bandwagon than to introduce competition. Passives at a decent price offer some hope for disruption. When the customer finally wakes up, no amount of good PR will save an expensive uncompetitive manager. For now it remains ‘a licence to print money’.

Best to stay away from these charlatans, who provide no advice, add no value and don’t understand the “products” they sell.

Can someone tell Magda to stop tweeting, and to drop the Itrix US and Eurostoxx fees. And no i’m not moving to your platform. .86% is absolute madness.

Reducing fees to where they should be will happen very slowly. It would mean moving out of wealthy suburbs, sell their holiday home and downsize their Porche to a Golf.

Not going to happen. No different to data.


I live in Sydney and manage 50 clients and their portfolios – averaging $5m each.

About 70% of my clients are ex South Africans who have migrated to Australia. Many of them were convinced by their SA wealth advisers, reluctant to give up on fees, to continue to have their portfolios managed out of SA. Ignoring the failure to proactively use Australian superannuation and other structures to maximise their after tax returns, I cannot believe the fund manager (asset manager) fees there, and the consistent underperformance of most funds against a basic index. South African investors are being ripped off by their Fund Managers in what is comparatively a low cost justification.

Seems Australia is not yet as competitive as the US and the Netherlands, but lots of South Africans are being robbed blind by their portfolio managers and the ANC.

A legit question. Why did you feel the need to say the number of clients and their average worth?
~$250mil, so a 0.9% fee would bring in $2.25 (R33.29 million). Must be nice. Wonder how much value your clients are getting cause you sure must be working your socks off to earn R3’800 every hour of the year, or R91’200 every day of the year.

Just wondering why you felt the need to mention it as I would have expected someone to just say I have, let’s say 50 clients, and about 70% are South Africans that immigrated to Australia.

Managing the clients must be hard work 🙂 their portfolios maybe a bit easier! 🙂 – Uneducated clients = high fees – I manage my own portfolio on various platforms at Zero platform fees and very low trading fees – But it requires a bit of effort and a bit of tax knowledge – Re Australia – Also a lot of smoke and mirrors in the Aus – Low returns and high fees in the Super funds and zero consequences for errant firms – Any “wrapper” (endowment/RA/Pens/Super) just hides excessive fees.

That you start with your clients and their value, tells me that you’re in the business of trying to compete with the very business of ripping of excessive fees. Not the sort I have any faith in, whatsoever. I’ll make a note to stay away.

We are again being exposed to the systems of the first world and trying to implement it in a third world. In the process the intermediary are killed and receive less and less remuneration for the work they do. Eventually , or at this rate, there will be almost no intermediaries and the returns would be exactly the same…remember, if anybody could predict the future, we would all have been rich… but no intermediary, or fund manager has that ability.
Greed has caused all companies to list on the stock exchange, which has always been vulnerable with regard to mutual companies, which in the past has delivered returns at an average of inflation plus two. This was especially important for the average salary joe, to make sure his money is protected but that luxury does not exist anymore.
In the mean time, the regulators personnel increase as well as their salary bills and surely the money must come from somewhere, easiest route, intermediaries….
There was a time when fund managers took a performance fee regardless of whether they achieved positive growth, wonder how many of them still does? Just my 2 cents opinion

The best way for investors to get a better deal on fees is for investors themselves to vote with their feet and select low or lower cost funds. Very few investors are forced to accept high costs. Expecting fund managers to embrace lower fees is the same as you, in whatever business you are in, to proactively lower fees. Nobody really wants to do it but market forces will speed up the process.

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