I have three living annuities (LAs) with Investec. Each has two to three balanced funds, such as the Coronation Balanced Plus Fund. I think the total costs are rather high. My drawdown has stayed at 2.5% for years. The performance of the funds has been dismal due to the economy. Is there a way to switch these LAs to a lower-cost platform?
Unfortunately, local investors have had to face the low-return environment over the past several years, with many investors fleeing to cash after such an extended period of volatility. Over the last five years up to March 22, the South African multi-asset high equity or ‘balanced fund’ peer group average annual return was 5.65%, according to ProfileData. Over the same period, the daily annualised average of the Consumer Price Index (CPI) was 4.91% according to ProfileData.
In a low-return environment, one of the focus points naturally centres on fees.
Financial advisors and fund managers have come under increasing pressure to justify their value-add to investors.
Since the respective inceptions of these funds, according to their February fund fact sheets, they are annualising the following returns:
- Coronation Balanced Plus Fund (inception April 1996): 14.3%
- Allan Gray Balanced Fund (inception October 1999):16.3%
- Foord Balanced Fund (inception September 2002): 13.9%
- Investec Opportunity Fund (inception May 1997): 16.4%
These funds represent the four largest South African multi-asset high equity funds or ‘balanced funds’. All of these funds have pleasing long-term returns despite the figures quoted earlier, which reflect the poor return over the past five years.
These funds are often criticised for their ‘high’ fees, particularly in the recent past. According to February fund fact sheets, the Allan Gray Balanced Fund (Class A) and Coronation Balanced Plus Fund (Class A) both have a total investment cost of over 1.7% over the past 36 months.
A good rule of thumb would be to keep costs low within reason. Investors look to reduce fees on fund management as well as administration. However, to exclude quality managers such as these due to relatively high fees during a period of extended underperformance could hurt an investor going forward.
Investment platform fees
The use of certain platforms can be a means of reducing the overall fees that one pays.
Certain platforms give investors the ability to access funds at institutional class level, which is cheaper than retail classes.
Some platforms charge their administrative fee based on a sliding scale of assets under management.
Some platforms will also charge a lower administrative fee on their own funds if held through their platform.
Each of these different aspects can be considered in an effort to maximise the cost efficiency of one’s investment based on the platform provider.
A standard fee that an investor would be charged on a platform such as that of Allan Gray is 0.5% (excluding Vat). A fee over and above this would suggest the use of alternative mainstream platform providers.
Procedure to move your living annuity or retirement annuity to another service provider
A living annuity can be transferred under a Section 14 transfer directive to another service provider, such as Allan Gray. Before requesting such a transfer, make sure no penalties or additional costs are involved in transferring a pension fund or living annuity. Your platform provider can assist you with the transfer to another service provider, and there is typically no cost associated with this, however you will need to enquire beforehand.
A final thought about fees:
- Cost is an important aspect to consider in one’s portfolio. However, an investment decision should not be made based purely on cost.
- Platform providers such as Investec and Allan Gray traditionally offer competitive administrative fee structures.
- There may be no benefit to changing your platform provider depending on your effective annual cost. A financial advisor would need to look at your entire portfolio in order to establish if cost-effective changes can be implemented.
Finally, stay the course. Andrew Lapping, chief investment officer at Allan Gray, gives his suggestions on ‘How to thrive in choppy markets’ here.