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Collective Investments
Friday, December 1, 2006
Better disclosure

Investors in Collective Investments will soon have a new measure – Total Expense Ratios (TER) – with which to evaluate their funds.

TER is a key tool for investors as it discloses the amount a fund takes out of its assets to cover costs measuring the impact of all expenses on a portfolio.
Typical costs are management fees (including performance fees), administration, custody, trustee, audit and bank charges as well as taxes, brokerage and stamp duty.
It is defined as the portfolio’s assets relinquished as operating costs expressed as a percentage of the daily average value of the portfolio calculated over a period of usually a financial year.
Di Turpin ACI chief executive says TERs have been adopted globally by leading financial services industries such as in the United States and the United Kingdom.
“The value for investors is that it will allow them to track their fund’s expenses and also directly compare various financial services products. We hope that other players will adopt it as well resulting in far greater disclosure for the consumer. Ideally, investors should be able to compare fund expenses across all product offerings.
“The Collective Investments industry has always offered low cost investments and been transparent in giving investors full information on costs and performance. We see TERs as another strategic tool for the investor.”
Collective Investment managers will start collecting data from the beginning of next year and the first data will be available to investors from 1st April 2007.
TER data will be made available to the Press for publication as part of the unit trust prices. The ACI has laid down comprehensive guidelines for the country’s collective investments.
It says that performance fees must be included in the TER. But to enable the investor to distinguish between costs that may be charged to the portfolio regardless of its performance and a performance fee that may vary significantly from one year to the next, the rand performance fee expense must also be disclosed separately, as a percentage of the average net asset value.
As there are multiple classes of collective investments with differing expense structures, management companies will have to compile TERs for each class.
The ACI is also stipulating that any portfolio performances or charges published in marketing material or the annual investor communication must contain the latest TER figures. In addition, it is mandatory that investors be provided with the latest TERs before investing in a fund.
Managers have to review disclosed TERs on a quarterly basis and communicate with all clients within 30 days if they are aware of any event which will materially alter the fund’s TER. TERs are not required for new investment classes which have been operating for less than six months.

Copyright © Insurance Times and Investments® Vol:19.6 1st December, 2006
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