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Fees charged in unit trusts

A Fin24 user wants to know about the fees fund managers charge. He writes:

I have a request. I want you to ask fund mangers about the fees they charge in their unit trusts.

Why do they always state their fees excluding VAT?

An example is the Allan Gray Equity fund. The fee at benchmark is 1.5% excluding VAT. But if you include Vat it becomes 1.71%, which is very high.

Do they do this to make their fees appear lower than they are?

Rob Dower of Allan Gray responds.

Fees are always shown including VAT where people are making decisions, in the sales process and of course in TER* numbers, which also include all of the other expenses charged in a fund.

The simplest answer to your question, which definitely is true with fact sheet fee numbers, is probably that it is a practice that has happened over time in the unit trust industry.

It has probably developed because it does look cheaper to only show the portion of costs that the managers themselves are charging, and maybe also that the ex-VAT numbers are rounder and therefore simpler for investors to get their heads around.

To allow correct comparisons between funds, it is more helpful that all managers are consistent in the way they show VAT, and that is currently to show management fees excluding VAT.
 
On the other hand, it is important for investors to understand exactly what they are paying and to whom.

It is therefore helpful to show the management fee that is being charged separately to the other expenses that a unit trust passes on to the investors, including not only VAT (which goes to Sars), but also trading costs (to a stock broker), audit fees, bank charges and trustee fees.
 
*The Total Expense Ratio is a holistic measure of cost published on all marketing material and includes the annual management fees that have been charged (both the fee at benchmark and any performance component charged), VAT and other expenses.

At Allan Gray we also include the trading costs incurred in the fund in the TER, which is not done by all fund managers.

- Fin24

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