Active fund manager Coronation Fund Managers will be cutting fees for two of its funds which are focused on retirees. Fees on its Balanced Defensive and Capital Plus funds will be reduced 10 basis points from 0.85% to 0.75% with effect from April 1.
These cuts were accompanied by a 12-month fee holiday for its Strategic Income fund, which would see the fee it charges its customers drop from 0.45% to 0.35%.
Pieter Koekemoer, head of personal investments at Coronation, says the fee cuts were driven by many of its customers switching from its multi-asset funds to income funds.
Essentially, these investors were moving from funds that are largely equity focused, to ones that are more focused on cash assets. Koekemoer says investors are switching because the returns they are getting are below par.
“JSE returns have been mediocre over the past five years.”
Income fund lustre
This shift in the market put the retirees who were invested in these funds in a difficult position as they were supposed to provide a regular income. The lacklustre performance of the stock market is why many of them switched to income funds, which offered better returns.
Investors realised they were getting cash plus two percentage points or inflation plus three percentage points with a high degree of certainty in the income fund. This was opposed to getting a return of inflation plus one or minus one percentage points – depending on the year in the multi-asset funds.
“They derisked their asset allocation, so they basically sold SA equities.”
Not a good idea
However, Koekemoer says this shift is not a good idea as the sharp reduction in interest rates over the past year meant the returns coming from income funds are set to plummet.
This can be seen in the return from Coronation’s Money Market Fund, which was 5.1% last year and has now shrunk to 0.3% for the year to date.
“The reason for the fee cut is because we are very concerned about how retirees have been behaving in their asset allocation decisions over the last few years,” says Koekemoer.
“We are trying to make it easier for them to do the right thing.”
Looking at the performance of the Balanced Defensive fund – it provided a return of 7.9% last year and is up 2.4% year to date. There is a similar story with the Capital Plus fund, which saw a return of 8.9% and is up 2.7% year to date.
A small carrot
Koekemoer hopes the cut in fees will act as a small incentive in attracting clients back to the multi-asset funds.
Although the returns coming from the multi-asset funds have been subpar over the past few years, they are still better suited to the needs of retirees, as they are optimised for paying a regular income but also have enough growth asset exposure to protect against inflation.
Koekemoer says the fee cut also ties into the philosophical debate about how much customers should be charged.
There used to be an argument about 15 years ago that premium fees should be charged because sophisticated risk management techniques were used on niche asset classes, such as listed property and convertible bonds.
Then about seven years ago that argument fell away, and the argument was that the same fee should be charged regardless of all these different asset classes.
But management techniques previously considered quite exotic have now become mainstream, which has led Coronation to think these fees can no longer be justified.
The savings, however, are small as it works out to about R1 for every R1 000 invested.