Foord Asset Management first to calculate Total Expense Ratios

Foord Asset Management has been the first collective investment management company to grab the bull by the horns and announce the Total Expense Ratio (TER) of their three collective investments.

The Association of Collective Investments (ACI) has requested collective investment members of the organization to begin calculating Total Expense Ratios with effect from April 1st 2007. Total Expense Ratios are retrospectively calculated expenses, presented as a percentage of the daily weighted average price of units in the fund. 

The TER formula takes into account service fees, bank charges, trustee fees, auditor's fees and brokerage. It also takes into account the cost of performance fees paid to fund managers, a retrospective fee that is notoriously difficult for investors to calculate. The ACI has requested that collective management companies should display a total expense ratio, as well as the performance fee component of the total fees.  

In their recent fund fact sheets, Foords total expense ratios for the Foord Equity Fund, the Foord Balanced Fund and the Foord International Feeder Fund for the period ending 31st January are 2%, 2.6% and 2% respectively.

At this stage, no other collective investment company has released their figures, but it is likely that Foords ratios will compare favourably to peer comparison, especially those funds with higher performance fees.

Investors must remember that a higher Total Expense Ratio does not necessarily imply a poor return, nor does a low Total Expense Ratio imply a good return. Furthermore, the  current Total Expense Ratio of a funds is retrospective is not an indication of future Total Expense Ratios,' said veteran independent financial advisor Ian Dodds.

Dodds who is Managing Director of Fundamental Investments said that the publishing and calculation of Total Expense Ratios would highlight the sometimes disadvantageous benchmarks used by collective investment companies.

'In the case of the Foord Equity Fund, Foord Asset Management has chosen a fair benchmark: Total return (capital plus income) of the FTSE/JSE All Share Index. Many funds in the same category use the FSTE/ JSE All Share Index, excluding income. This means that the Foord fund manager', David Foord has to work harder to earn his performance fees, said Dodds.

'In other cases, particularly in the Targeted Return category of collective investments, you will see that there are many benchmarks which are calculated relative to the consumer price index. In the recent investing environment, these relatively low benchmarks have ensured that some fund managers have earned very generous performance fees, sometimes uncapped', said Dodds.

Dodds said that another group of funds which will be interesting to monitor will be the Fund of Funds collective investments.

He said that while some multi-manager funds have negotiated favourable volume based discounted fees on underlying funds, and passed these on to investors, others funds have been extremely reluctant to divulge total costs. This will change with the release of total expense ratio figures.