Core Chartbook 2024: Trends in cost and relative performance

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.

Estimating "fund market" efficiency using asset weighted returns

Market theory states that the total return of the (equity) market should be equal to the asset weighted returns of all market participants before fees. We have tested this within the “funds market” by looking at the average peer weighted returns within the largest fund categories before and after fees. We have compared these to the representative rules-based fund in each category to test whether the average rand invested in the category has delivered a higher return. If it is close to the representative rules-based fund, we may say that the allocation to funds has been efficient within a given category over time.

If we look at the SA Multi-Asset High Equity category, we can see that the peer weighted return before fees is around 0.5% on an annual basis over 10 years. Given that most of the large funds are active, this means that they have delivered excess returns before fees of 0.5% compared to a rules-based fund. After fees however, they have underperformed by 0.7% per annum over this period.

Source: Morningstar

When we look at fund categories that hold a significant amount of fixed income, such the SA Multi-Asset Low Equity and SA bonds categories, we found narrower dispersions before fees compared to the SA Multi- Asset High Equity category. Peer group weighted returns for SA Multi-Asset Low Equity and SA Bonds funds produced excess returns of 0.2% per annum before fees. Again, after accounting for fees, the peer weighted returns lagged by 0.9% and 0.3%, respectively.

Dispersion in the SA Equity category is similar to the SA Bond category before fees. As the TICs for equity funds is generally much higher than for bond funds, the resulting underperformance is also higher at 0.7% per annum.

The peer group weighted average annualised return for Global Equity funds is 0.5% below a representative rules-based fund’s returns over 10 years before fees.  After fees it is a staggering 1.4% lower, which provides some insight as to why the market share for Global Equity rules-based funds is much higher than for any other fund category.

Source: Morningstar

This is part 4 of our Core Chartbook series.

• For Part 1 Long-term trends in the CIS industry click here
• For Part 2 Trends in rules-based investing click here
• For Part 3 Asset managers, fund growth and flows click here

Disclaimer

Please note that Nedgroup Collective Investments (RF) Proprietary Limited is not authorised to and does not provide financial advice. This document is of a general nature and intended for information purposes only. It is not intended to address the circumstances of any investor and cannot be relied on as legal, tax or financial advice, either express or implied. Whilst we have taken all reasonable steps to ensure that the information in this document is accurate and current on an ongoing basis, Nedgroup Investments shall accept no responsibility or liability for any inaccuracies, errors or omissions relating to the information and topics covered in this document. Nedgroup Collective Investments (RF) Proprietary Limited is a member of the Association for Savings & Investment SA (ASISA).