Insights

• Increased scrutiny on costs across the value chain, has been instrumental in the adoption of rules-based funds in South Africa. Rules-based funds are often used to reduce Effective Annual Costs (EAC)
• Total Investments Charges (TIC) continue to decrease across all fund categories, but the percentage rate of decline has been the highest among rules-based funds.
• Over the past ten years, rules-based funds have outperformed their peer weighted average returns after fees, across all the largest fund categories.

Total investment charges (TIC) in the CIS market

In our previous articles, we explored the evolving local and global investment landscapes with a focus on rules-based investing. In this segment, we delve into the costs and relative performances of these funds, as they are important consideration for investors.

We looked at the asset weighted average TICs at a fund fee class level in all the major fund categories across the industry and within rules-based funds. The weighted industry average TICs are between 2 to 3.5 times the weighted averages for rules-based funds; Foreign equity funds having the lowest discount (2 times) and SA equity funds the highest (3.5 times). SA Interest bearing is the only category where there isn’t much of a difference between rules-based funds and the fund category.

Source: Morningstar. Asset weighted across all fee classes with disclosed TICs

In 2018, the asset weighted TIC across all rules-based fund fee classes was 0.46%, equating to 46 cents for every R100 invested. As at the end of 2023, this average had decline by 15% to 0.39%. The broader Collective Investment Schemes (CIS) industry also experienced a reduction in TICs, dropping from 1.06% to 0.92%, a 10% decline over the same period.

The weighted TIC for the Foreign equity fund category saw the greatest decrease from 1.4% in 2018 to 1.04% in 2023, a decline of 26% over the period. This was largely due to the market share of rules-based funds increasing to 37% of this category’s AUM. Rules-based funds still make up a small percentage of totals CIS assets (~9%) and so haven’t had a direct impact on overall asset weighted TICs. Pressure to keep total cost down for investors across the value chain has been the major driver of the reduction in TICs across the industry.

Rules-based funds have seen the greatest declines in TICs over the past 5 years. The average asset weighted TICs for South African Multi-asset rules-based funds have declined by 33%, from 0.52% in 2018 to 0.35% in 2023. Rules-based funds in the SA Bond and Global Multi-asset categories have seen similar declines of 33% and 27%, respectively. Given the lower fees of these funds, the rates of decline are far more sensitive to reductions of even a few basis points.