Understanding investment costs

[AntennaMan]

Hi guys

I've got some cash that I want to invest. I'm looking into Allan Gray Balanced Fund or something similar from Coronation/ Investec/ whoever....

I just need some help understanding the cost calculations. I want to make use of a simple example (nice round numbers...), so if someone can explain the costs involved.

So for the example:
I chose Allan Gray Balanced Fund.
I plan to invest a lump sum of R100 000 for 5 years.

Now, according to the Allan Gray Balanced Fund Factsheet, they over the last 5 years they had a return of 16.4%, but let us say in the example they average 15%.

Fees are calculated according to the performance against the benchmark.
1% ex VAT when matching the benchmark, 0.5% minimum fee, 1.5% maximum fee.

What exactly will the fees be after year 1, year 2, year 3, etc if we assume that they match the benchmark?

The Factsheet mentions a Total Expense Ratio (TER) of 1.78. Is this good or bad? Should I look for something with a lower TER?

Any help will be appreciated.

 

[borga]

A high TER is no neccesarly a bad thing if it is due to a high return on the fund, the same with the opposite, a low TER with non-existant grow is worse than a high TER with high grow.

A TER of 1.78 is high, this is normally the case with actively managed funds, passive funds will tend to have a lower TER with the assumption that actively management funds will be able to recognise a good opportunity and take advantage of it, which would not be the case in a passive fund.

That said only about 50% of active managed funds outperform the average and if expense is taken into account that number drop to something like 20%.

So if they match the benchmark it would 1% performance fee, other cost such as admin/audit cost would also be included.

These cost currently seem to be 0.1% for other cost and Vat currently 0.13%, so if they match their benchmark the fees would probably be around 1.23%

However I am not sure why currently their fee for benchmark performance is 1.06% and not 1%, or why their performance fee is 0.37% which would indicate they outperformed their benchmark by about 3.7% which doesn't seem to be the case if you look at their 2 year performance 20.6% vs benchmark of 18.5.

 

[supersunbird]

In index funds that track the same index TER is very important since you are paying for the exact same thing (a 330ml coke for R8 is better than a 330ml coke at R9, if as easily accessible), in combination of how true it tracks the index.

 

[HavocXphere]

A high TER is no neccesarly a bad thing if it is due to a high return on the fund

That assumes high TER can to some extent "buy" good results, which I'm not entirely convinced is true.

 

[borga]

That assumes high TER can to some extent "buy" good results, which I'm not entirely convinced is true.

Which is why I mentioned that only something like 20% of active managed funds outperform passive investment after expenses is taken into consideration.

And not knowing which 20% will outperform make passive investment a more reliable method.

Too bad even our cheapest EFT is still expensive by global standards.

Some of Vanguard EFT has a TER of 0.1%

 

[Cage Rattler]

Feeling lucky that you'll find a fund manager that knows what he's doing?

The proportion of skilled fund managers has diminished rapidly over the past 20 years, while the proportion of unskilled fund managers has increased substantially. Specifically, the proportion of skilled funds declines from 14.4% to 0.6%, while the proportion of unskilled funds rises from 9.2% to 24.0% of the entire universe of funds. The balance of funds, approx 75%, return zero alpha (net of expenses). Btw, net of expenses, skilled fund managers return positive alpha whereas unskilled fund managers return negative alpha.

Almost all outperforming funds appear to capture (or waste through operational inefficiencies) the entire surplus created by their portfolio managers. It is noteworthy that the proportion of skilled managers (before expenses) declines substantially over time, again indicating that skilled portfolio managers have become increasingly rare.

 

[AntennaMan]

So from what I gather here, I had a look at various options from different companies. It would seem like the Balanced Plus fund from Coronation is not a bad option. Annualised performance is better than Allan Gray, while the TER is slightly lower.

 

[Gaz{M}]

My understanding is that the % return is after fees anyway, so you don't need to worry about it.

If it is 15% annualised per year then your R100 000 would go like this:

Year 1...R100 000 x 1.15 = R115 000
Year 2...R115 000 x 1.15 = R132 250
Year 3...R132 250 x 1.15 = R152 087
Year 4...R152 087 x 1.15 = R174 900
Year 5...R174 900 x 1.15 = R201 135

But it will be a different % each year, average of 15% per year over 5 years.