Are hidden fees eating into your investment returns?- Unit Trust expert

Tracy Jensen, Chief Product Architect of 10X Investments.

One of the biggest mistakes made by investors when assessing and selecting a unit trust is focusing too heavily on performance of the funds. According to the Morningstar Global Fund Investor Experience 2015 study, the most consistent predictor of an investments performance over time is its annual expenses. The reports states that “Clearly, the best practice from an investor’s viewpoint is to have access to – and purchase – funds that have lower annual costs.”

Tracy Jensen, Chief Product Architect of 10X Investments agrees that fees are critical when selecting an investment portfolio.

Using a simple example, Jensen demonstrates the impact of costs over time. “Let’s imagine that Jerry and Ben each invest a lump sum of R 100 000 into a high equity balanced investment portfolio, earning a long-term average of 6.5% per annum above inflation. However, each pays a different fee. Jerry pays a total cost of 2.5% pa (excl. VAT), which is a representative of the total cost of investing in South Africa including platform and advice fees, while Ben will pay only 0.5% pa (excl. VAT).

“After 20 years, Ben would have R315 000 and Jerry just under R200 000 in today’s money. Therefore, just as a result of costs, Ben has nearly 60% more money.”

Greater transparency needed

According to the Morningstar report, the cost of South African unit trusts, including advice and platform fees, are among the highest in the world. The report outlines that high fees, poor disclosure and lack of fiduciary duty are the major cost drivers of this phenomena.

Warranting a dismal score of D+ by the Morningstar report for poor disclosure, Jensen says that while the ASISA guidelines are generally considered best practice, these are not legislated. “Nor are all financial service providers member of ASISA, which means that these companies are not required to comply with these standards.”

The costs of a unit trust

Jensen says that when selecting a unit trust, investors need to take into account the various costs associated with it. “A good starting point is the Total Expense Ratio (TER). The purpose of a TER is to disclose to investors the total cost of investing in a given portfolio over a year, as a percentage of the value invested.”

“If you’re invested in a portfolio via a platform, or you have a financial adviser, then you’ll need to add these fees to the TER as well in order to get a better estimate of your actual cost of investing,” she adds.

Jensen urges investors not to only check the TER on their existing portfolios, but also confirm which fees are excluded from the TER of their investment. “Not all unit trusts apply these recommendations uniformly. Trading platforms, financial advisors and brokerage fees are often excluded from the TER, however, these costs need to be taken into consideration when comparing unit trusts.”

Jensen explains that the Association for Savings & Investment in SA (ASISA) has a standard for which expenses should be included in the TER of unit trusts. “TER should include expenses incurred in the management of the portfolio, including any taxes related to operations and VAT incurred. It’s important that all investors understand which costs are included and which are not.”

“Even if investors had the true total cost of investing in unit trusts, many don’t understand the impact a seemingly small percentage fee can have on their investment outcome,” concludes Jensen. “Only when the impact of all costs are clearly and simply illustrated will investors be able to make more informed decisions”.

10X Investments’ recently launched a simple, low cost unit trust alternative. Promising diversity over a number of asset classes, with each asset component tracks an index, the 10X Prime High Equity Unit Trust is ideal for investors with a time horizon of five years or more.