Evaluating fund performance: the cost factor

Investors need to understand all the costs that apply to their portfolio returns. Knowing the letter behind the fund is a good place to start.

Since April 2000, Collective Investment Scheme (CIS) companies were allowed to have multiple fee classes of the same fund, and no restrictions were placed on the maximum fee funds could charge. Funds now have a letter behind their name to indicate the kind of fee they charge.

Portfolio managers do not manage the different classes separately, rather the various classes are pooled and managed as a collective. The difference in performance between the various classes can be solely ascribed to the difference in annual management fees.

Funds that were launched prior to June 1998 have an R behind their name, referring to the 'Regulated' or 'Ring Fenced' class. The maximum fee these funds could charge was 1% p.a. (pre-VAT). Many CIS companies closed their R class funds to new investments, and launched more expensive A class funds that they offered to retail investors.

Substantial savings

At the same time they launched B class funds for institutional investors, which were often cheaper than the R class, since it is cheaper to administer an account for a big institutional client than managing several smaller client accounts. There can be a substantial saving in fund management fees if you have access to the B or R class rather than the A class.

Certain CIS companies have made their B class funds available to a handful of Linked Investment Service Providers, although LISPs will charge additional fees for administration. Certain CIS companies still offer the R class to new investors. One can sometimes gain access to institutional funds via some multi-manager funds who use their bulk to negotiate better deals, although they also charge an additional fee.

New addition

The most recent addition is the all-in-fee class (C or D). This fund class includes the CIS fee, which is usually substantially cheaper than the A class fee, the broker fee and the admin (or LISP) fee. There can be substantial tax savings for discretionary clients in such a fee structure because the broker and admin fee are effectively paid with before tax income.

R-class Cheaper class.
Maximum fee 1% p.a.
Often closed to new business.Can't charge a performance fee.Only foreign funds invest in other funds.Total Expense Ratio (TER) important if invests in other funds.

A-class Often the most expensive class.
Available to the retail investor. Might charge a performance fee.
Understand what you pay if the fund returns benchmark.Might invest in other funds.Use the TER if invests in other funds or charges a performance fee.

B - Class Cheaper than R class.
This class is typically the institutional class.Might charge a performance fee.
Understand what you pay if the fund returns benchmark.Could invest in other funds.Use the TER if invests in other funds or charges a performance fee

.
C -Class This is often the Fusion fund class.More likely to charge a performance fee.
Understand what you pay if the fund returns benchmark.Could invest in other funds.Take out the built-in 1.71% broker and platform fee when comparing TERS with other fund classes.