Publications
Partners
Unit trusts costs can be contentious.
Investors understand they must pay for the necessary administration and for the skill of a fund manager in an actively managed fund. Costs vary a lot between different funds but in some cases are regarded as being too high.
The best aspect of the simpler unit trust costs is that they’re openly displayed. Some asset managers – RE:CM Collective Investments being an example – have done away with upfront costs completely.
Other asset managers charge an initial fee of more than 5%, which does seem excessive.
That percentage is taken from the investor’s upfront capital, so they’re getting 5% less assets in the fund.
Costs range from 0.5% to 2.5%/year, the latter also seeming a bit high.
About the best basis for comparison between unit trust costs is the total expense ratio (TER).
That’s expressed as a percentage of the total underlying costs over a one-year period.
Rating firms such as Morningstar provide TERs for all the funds.
Investors should remember a more expensive fund doesn’t mean it’s a better fund.
But the most controversial are the fairly recently introduced performance fees, where the management company or fund manager claims a percentage of outperformance above a stated target.
That will typically be a few percentage points above the benchmark.
This writer’s personal gripe with performance fees is that you’re paying an active manager – through part of the upfront and annual costs – to beat the market or fund’s benchmark over a reasonable timeframe.
So why should the manager be paid twice – out of the investor’s profit – for doing what he’s meant to do.
Performance fees can also encourage reckless investing if the manager is short of his target.
And those fees aren’t really logical.
If the manager does well the size of assets in a portfolio grows and the annual fee is therefore worth more money.
That should keep everybody happy.
Investors also need to watch costs in some funds provided by multi-managers, linked investment service providers and offshore funds.
While most unit trust costs are fully disclosed, if the fund is employing other asset managers there will be further underlying costs that aren’t always so openly disclosed.
- Finweek
Investors understand they must pay for the necessary administration and for the skill of a fund manager in an actively managed fund. Costs vary a lot between different funds but in some cases are regarded as being too high.
The best aspect of the simpler unit trust costs is that they’re openly displayed. Some asset managers – RE:CM Collective Investments being an example – have done away with upfront costs completely.
Other asset managers charge an initial fee of more than 5%, which does seem excessive.
That percentage is taken from the investor’s upfront capital, so they’re getting 5% less assets in the fund.
Costs range from 0.5% to 2.5%/year, the latter also seeming a bit high.
About the best basis for comparison between unit trust costs is the total expense ratio (TER).
That’s expressed as a percentage of the total underlying costs over a one-year period.
Rating firms such as Morningstar provide TERs for all the funds.
Investors should remember a more expensive fund doesn’t mean it’s a better fund.
But the most controversial are the fairly recently introduced performance fees, where the management company or fund manager claims a percentage of outperformance above a stated target.
That will typically be a few percentage points above the benchmark.
This writer’s personal gripe with performance fees is that you’re paying an active manager – through part of the upfront and annual costs – to beat the market or fund’s benchmark over a reasonable timeframe.
So why should the manager be paid twice – out of the investor’s profit – for doing what he’s meant to do.
Performance fees can also encourage reckless investing if the manager is short of his target.
And those fees aren’t really logical.
If the manager does well the size of assets in a portfolio grows and the annual fee is therefore worth more money.
That should keep everybody happy.
Investors also need to watch costs in some funds provided by multi-managers, linked investment service providers and offshore funds.
While most unit trust costs are fully disclosed, if the fund is employing other asset managers there will be further underlying costs that aren’t always so openly disclosed.
- Finweek
