Cost-effective investing

2012-11-10 14:23

When deciding where to place your cash, unit trusts may still be more cost effective than the new exchange-traded funds, writes Maya Fisher-French

Research, both internationally and in South Africa, has shown many active unit trust fund managers underperform the market once costs are taken into account.

In 2005, Deutsche Securities analyst Roland Rousseau did a study on the destructive effects of costs on long-term performance.

His study of share performance over 20 years showed a fund manager would have to outperform the JSE all share index (the average performance of our stock market) by 58% just to cover the costs of paying for an active fund manager to select shares that he or she believes will outperform.

As a result of this cost hurdle, about two-thirds of fund managers underperform the index after costs in the long run.

And if you think you can pick the one-third who will outperform, latest research from Vanguard, the pioneers of passive investing and today the largest US asset manager, has shown past performance is also not a good indicator of future performance when it comes to selecting a fund manager.

According to Vanguard, investors who select an active fund manager because they have a successful track record have more chance of picking a dud than a winner.

“The persistence of performance among past winners is no more predictable than the flip of a coin,” says Vanguard’s chief economist in Europe, Peter Westaway, in a recent Financial Times article.

Rousseau argued that even if a fund manager was very good at selecting shares, if the fund was very large and the fund manager wanted to buy shares in a small listed company he thought would outperform, the fund manager would struggle to buy enough shares in the company to make a meaningful impact on the total fund performance.

Rousseau argued that very large general equity funds would struggle to outperform as a result, especially as they have to deliver returns in excess of costs, normally in the range of 2% a year, just to deliver an average return.

This makes a very compelling argument for investing in a passive fund, where your investment simply tracks the performance of an index, such as the JSE’s average performance.

Exchange-traded funds (ETF) such as Satrix and NewFunds, Absa Capital’s range of funds, are promoted for being very cost effective as they simply track an underlying index and avoid active management costs.

The annual fees for these funds are 0.4% compared with the 1.5% to 2.5% charged by an actively managed unit trust.

The problem is that while the fund fees are less than half the cost, the cost of access is actually higher.

A presentation by Sanlam Investment Management at a conference held by the Association of Collective Investments showed that after adding on the costs of access, an exchange-traded fund could be more expensive than investing directly into a unit trust.

For example, if you want to invest on a monthly basis in an ETF, the annual fees of the investment platform make it nearly as expensive as an actively managed unit trust.

For example, the Satrix Investment Plan charges R3.50 per debit order and an annual fee of 0.75%. Add this annual administration fee to the fund management fee and your total annual fees are closer to 1.2% a year.

Unit trusts that track an index, such as Old Mutual Rafi and Sanlam’s range of tracker unit trusts, actually offer better value for money, simply due to economies of scale.

Old Mutual and Sanlam are able to tap into their existing unit trust administration platform and benefit from economies of scale, while ETFs are relativity new in South Africa and are still growing in popularity.

It therefore costs more to run the administration platform per client. That said, the fees for ETF platforms have been reducing as they gain popularity, but they remain above what can be offered by the unit trust industry in terms of access costs.

In cases in which an investor is, however, already using an existing investment platform, it may be more cost effective to invest in the ETF.

There is currently no unit trust offering exposure to commodities such as platinum or gold, while these can be accessed through ETFs such as Absa’s NewGold. So you need to decide what platform best meets your needs.

Most cost-effective way to invest passively
Investing monthly:
If you simply want to invest a few hundred rands into a passive fund as a
low-cost investment solution, then investing directly into a tracker unit trust would be your best option.

Sanlam has a range of six passive tracker funds for a minimum of R200 a month. If you invest directly through Sanlam, there is no upfront fee and the annual fee ranges from 0.45% to 0.58% depending on the fund.

This makes it the most cost-effective way to access the stock market for a monthly investment.

Helena Conradie, head of sim.smartcore, says they will be adding to the range, which will include a balanced tracker fund that will combine bonds, cash, property and equity into one low-cost unit trust.

Sanlam recently bought out the remaining 50% shareholding in Satrix, the country’s largest provider of equity exchange-traded funds.

Conradie says the company will be rebranding their unit trust tracker funds under the Satrix brand, thereby allowing investors to select between exchange-traded funds and unit trusts in order to find the optimal investment platform to access tracker funds.

Old Mutual:
Old Mutual offers the Rafi 40 tracker fund with a minimum monthly investment of R500 and it has a 0.86% annual fee. Visit

Grindrod Bank:
Grindrod Bank offers the Rafi enhanced index fund with a minimum monthly investment of R500 and an annual fee of 1%. Visit

For a portfolio of passive investments
If you want to invest across several passive funds and switch between them, then investing through a platform such as ETFSA ( would provide you with greater flexibility.

The platform has an annual fee of 0.8%, which you need to add to the underlying fund costs, bringing the total annual fee closer to 1.5%.

Investing through a share portfolio
If you have an existing share portfolio and wish to include a passive fund as a core investment, then an exchange-traded fund (ETF) would be the most cost-effective option as you purchase it as a share on the JSE.

It would form part of your share portfolio on which you are already paying administration fees, so it would have little impact on total costs.

Investing through a Linked Investment Service Provider (Lisp)
If you already invest through a Lisp and want to include a passive fund, this would have to be done through a unit trust option as ETFs are not available through a Lisp.

Conradie says there is pressure from the industry for Lisp’s to adjust their platforms to accommodate ETFs in the future.

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