Let the investor beware

Index tracking funds are starting to make themselves felt locally, and if the marketing speak is to be believed, they are cost effective and moderate risk vehicles. But at least one index tracker is wondering why there isn't more interest from institutional and retail investors.

It appears that consumers and institutions are asking questions have been asked about the high fees that passive fund managers are charging, when compared to their international competitors. This is also the case in terms of the index tracking funds.

Consider for a minute the annual management fee that a local index tracker charges. Its 1%, and according to Clyde Rossouw- senior portfolio manager at Investec Asset Management, this is the highest fee he has seen for an index tracker fund, for a fund or product that will essentially under-perform the market that it tracks, in his words.

Working through the product literature that is on offer for the foreign component of the tracker, which incidentally are punted as extremely cost efficient, there is an all-in fee of between 0.20% to 1% per annum.

The all-in fee is defined as the compensation of the investment management company, which is included in the daily NAV calculation and covers certain costs.

So we looked at the local tracker fund- there is stock brokerage at 10 basis points, an administration fee of 1%, and it doesn't stop there, you also pay 10 bps to sell the security.

Roussouw was speaking at the Momentum investment conference in the North West province recently, when he said that this must be put into an international perspective. One of the biggest index tracker fund managers internationally, charges between 10 to 12bps.

Makes you think doesn't it?

Editor's comments
*The debate around investment performance and alpha and beta is hotting up, and it focuses on what fund managers should and can be leveling fees for.
*It appears that the water is very muddy, but what can't be disputed is that retail investors aren't privy to all the information and analysis that their institutional compatriots are, and this is where the cynical arbitrage opportunities are.
*Again, understand the investment opportunity and understand it well, as your clients will ask you the questions. Ask for clarity and transparency when talking to product providers, and if you aren't happy with the responses talk to us. We will endeavour to get the whole truth and nothing but the truth.