Back-office on track for total expense ratio

Fund administrators are gearing up to calculate and publish the total expense ratio (TER) for unit trusts from 30 April 2007.

The ACI recently conducted a snap poll on the readiness of the industry for the new TER disclosure requirement. Indications were that the majority of investment managers were ready.  In certain instances, investment managers are already disclosing TERs on fund fact sheets. 

The TER has been introduced by the Association of Collective Investments (ACI) to provide investors with a clearer picture of the total annual costs involved in running an investment fund.  TERs are accepted globally as a suitable measure of portfolio expenses and are relevant to investors as the expenses come out of the portfolio and thus affect investor returns.

Russel Julie, Director of Transfer Agency at FinSource, says that publication of TERs will allow investors to compare their funds against the average of the funds sector peer group and across various management companies. "As the calculation method is specifically prescribed, direct comparison will be meaningful," he says.

He cautions however: "The information needs to be interpreted carefully as the TER will include costs such as brokerage which will be higher if the fund is actively traded.  Clearly, if such active management results in enhanced performance, investors would generally be willing to incur the additional cost."

Fund administrators such as FinSource have a responsibility to ensure that TERs for clients funds are correctly calculated per fund class. TERs for single-tier funds are required for publication from the end of April; TERs for funds of funds will be required from the end of May.

Julie says the "back-office process" for the TER calculation is intensive but that FinSources strategic investment in a full accounting based portfolio administration system has made the process fairly easy to implement.

Julie answers some questions investors may ask:

Q         :           Is the TER a new cost?

A         :           No. It is merely the disclosure of costs that are already incurred and paid for within the portfolio. These costs have always been part of the operational expenses of the portfolio but it would have been difficult for investors to draw a direct comparison of these expenses between different collective investment schemes.  This single measure now enables such comparison.

Q         :           Are these costs different from upfront costs?

A         :           Yes.  The costs being measured and disclosed as the TER are costs incurred within the portfolio and do not include any upfront costs such as initial fees or upfront commission which are usually once-off costs.  In terms of the ACI standard, a TER includes any expense of the portfolio that is necessary for its operations. These expenses include but are not limited to the following:

            -           management fees

            -           administration costs

            -           custody fees

            -           trustee fees

            -           audit fees

            -           bank charges

            -           taxes

            -           brokerage

            -           stamp duty

In the case of multi-tiered funds, expenses at the top tier as well as on a proportional basis at the bottom tiers are to be included.

Q         :           Is the TER indicative of fund performance?

A         :           No. It is a measure of the portion of the income in the portfolio that has been relinquished as operating costs for a particular portfolio.  One could therefore say that it shows what it costs to manage and administer the pool of assets in a particular portfolio.

Q:        Where can I find the TER?

A:         Publication of TERs is required with each of the following disclosures:

                        -           Fund financial statements

                        -           Monthly, quarterly and annual reports

                        -           Fund fact sheets

                        -           Internet publications

                        -           Annual unitholder communications.

Q         :           What is the value of the TER to investors?

A         :           The TER is merely another piece of information that investors should use in order to make informed investment decisions.

Julie concludes: "We welcome the ACI's new standard as a way of improving transparency in the collective investments industry, in line with world standards.  Investors will now know exactly how much of their investment income is spent on costs rather than distributed as income."