How cost transparency works in your favour

Collective investment schemes have come under the spotlight lately due to increased transparency of costs. This is good news for the investor. What are Collective Investment Schemes, why are they so popular, and why is cost transparency important? We dissect these questions in our new series on collective investments.

Thousands of investors don't have the kind of money and knowledge to create a massive investment portfolio, but by pooling their money they can have access to a wide range of investments. This is the essence of collective investments - money is pooled into a portfolio or fund which is managed by an asset manager, who then has the same buying power as a billionaire investor.

Types of collective investments include unit trusts, multi-manager investments, and exchange traded funds (ETFs).

The main attraction of collective investments for the average investor is that they are affordable. The minimum monthly amount payable can be as little as R250. Another attraction is that you don't need time and expertise to select good investments - the asset manager does that for you.

Over the last four years billions of rand have streamed into the collective investment industry as people have come to appreciate the advantages of this type of investment vehicle.

Regulation of the industry
Collective investments cannot go unregulated, and the Collective Investment Schemes Control Act (CISCA) was introduced in 2003, replacing the Unit Trust Control Act of 1981. CISCA ensures that collective investment managers follow legislated best practice, and this is excellent news for investors. Furthermore, every collective investment scheme (CIS) is governed by a deed, which falls under the authority of the registrar at the Financial Services Board (FSB). The registrar has the authority to inspect the work of the trustee and the manager.

Each CIS is obliged to appoint a trustee or custodian, and one of the functions of the trustee is to ensure that the manager operates the CIS in accordance with the deed. Another important function of the trustee is to act as custodian of all cash and securities in the portfolio. Underlying assets do not in any sense belong to the manager or management company, but are held on behalf of investors by the trustee. This provides important protection for investors.

Investors' peace of mind is further ensured by a watchdog and coordinating body - the Association of Collective Investments (ACI) - which was established to promote the benefits of collective investments, and to facilitate the development and growth of the industry. The ACI acts as the custodian of codes of practice and standards throughout the industry.

Transparency of costs
One of the most recent achievements of the ACI was to make it compulsory for fund administrators to publish the Total Expense Ratio (TER) of their fund from 30th April 2007. This sounds like a fancy term, but it's simply the operational expenses that a collective investment incurs - such as taxes and administration fees - expressed as a ratio of the average portfolio value over a year.

TERs are accepted globally as a suitable measure of portfolio expenses and will be relevant to you as an investor, as the expenses come out of the portfolio and thus affect your returns. Your fund's financial statements, monthly and quarterly reports and fund fact sheets must now contain the TER.

Where do TERs fit into the overall costs of a collective investment? Firstly, they are not a new charge or an increase in the annual management fees. They are costs that have always been paid, reducing the net asset value of your units in the fund, but were not disclosed to investors in one simple figure. Secondly, TERs are the ongoing costs in the fund, and are separate from:

• Any initial or upfront costs (Unit Trust management companies charge an initial fee when units are purchased. This is generally in the region of 5% plus VAT for an equity fund, 3% for a property fund, 1% for a fixed interest fund, and 0-0.5% for a money market fund.)
• Any ongoing commission you may need to pay to an adviser or broker who sold you the investment.

And if you are investing in a unit trust fund via another product, such as a retirement annuity, or through a linked investment service provider, there may be other costs associated with that product or that service provider.

For more information on Sanlam's collective investments, visit http://www.sanlam.co.za/eng/aboutus/sanlambusinesses/sanlamcollectiveinvestments/homepage.htm

Next issue: types of unit trusts - choosing the right one for you.

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