Page 59 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Costs and Pricing

These numbers put costs into perspective. The JSE Top 40 real return (return after inflation) of
0.41% quoted above was before annual fees. After all costs, an equity fund matching the return of the
indexbut with costsofmorethan0.5%was losing money in real terms. To put it another way, if the
rate of return in a portfolio before costs is 10% per year and the fund’s TER is 2% it means that a fifth
of the investment performance is sacrificed to fees and charges every year. Because most fees remain
the same regardless of market performance, this situation only gets worse when rates of return fall.
At a TER of 2% and returns of 4% per year, half of portfolio performance is absorbed by costs.
Thankfully the three-year period described above is not indicative of longer-term returns in the
local equity market. Thanks to the JSE rally from November 2020, real rates-of-return look much
better to end July 2021 – 10.72% p.a. for the Satrix 40 ETF vs inflation of 3.93%. Over ten years to
end July 2021 the real rate of return on the Satrix 40 ETF was 6.45% p.a.
Annual costs are not the only issue. Entry costs such as initial charges or upfront commissions
paid to financial advisors also have an impact. Very few managers and platforms still charge initial
fees, but upfront commissions are still common.
At the maximum upfront broker commission of 3.45%, investors pay away R3 450 for every
R100 000 invested. In a fund achieving 10% per annum, this turns into over R23 000 over 20 years.
It might be argued that this is not a significant difference given the total return at the same rate on
R96 550 (the capital invested after payment of commission), which is almost R650 000, and that
3.45% is a small price to pay to get the correct advice, but the fact remains that R23 000 is not an
insignificant amount. It highlights the fact that commissions must be evaluated against the quality
of advice given. There is no point, as an investor, in saving on costs but ending up in a mediocre
fund. On the other hand, there is no value in paying commission only to end up in an expensive
active fund which underperforms passive funds.

Transactions
Conceptually, the calculation of a price on a daily basis for each participatory interest in a CIS is
straightforward: the market value of the portfolio is calculated, and this is divided by the number
of units in issue.
From the point of view of the management company, things are slightly more complicated.
For a start, market values may need to be obtained from a number of different markets, both in
South Africa and overseas. Once an accurate portfolio valuation is in place, the pricing department
also deals with:
Accrual of all interest and dividends due to the portfolio
Distribution of interest and dividends when applicable
Any liabilities against the fund (such as service fees, accrued audit fees, trustee fees, and so on)
In a large management company, the administration department will provide the pricing
department with the number of units in issue at close of trade, taking into account the sales of
units, repurchases of units, and any switches that have
taken place.
The final price of each participatory interest,
known as the net asset value price, can now be
calculated by dividing the net portfolio value by the Real Returns
number of units. This is the price published in the Real returns can be defined as
daily and weekly newspapers, and is also the price at net investment returns achieved after inflation.
which units are repurchased. If inflation was 4% over the year and a portfolio
achieved 6% growth, the real return was 2%.
Rates of return before inflation are called
Purchase and Repurchase
nominal returns.
Most SA unit trusts repurchase units at the NAV
price without any deductions. This makes it easy for an investor to calculate the total value of an
investment in a unit trust by looking up the NAV price in the daily newspaper or on the fund’s website.
To give a simple example, if an investor holds 1253 units in a unit trust, and the published
price for the fund is 357.12, the investor’s holding is worth R4 474.71.
1253 units multiplied by R3.5712 per unit = R4 474.71

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts