Good news for South African investors

Investment fund fees in South Africa continued to trend lower in 2023, resulting in greater returns and savings for investors. 

This is feedback from Michael Dodd, a senior fund analyst at Morningstar South Africa, who outlined the reasons behind declining fund fees in a recent study. 

The trend of declining fund fees is observable and consistent across global markets, including South Africa, as investors search for greater returns amid elevated inflation and interest rates. 

Several factors have contributed to lower fees, including the growth of passive investing, increased competition among asset managers, and an evolution in the economics of financial advice.

Dodd explained that this has been positive for investors, who have benefitted from these dynamics and saved money in fund fees as a result. 

The study measures South African fund fees using the Total Expense Ratio (TER), the global standard for measuring the total cost of the fund to the investor. 

It is expressed as a percentage of the fund’s net asset value and includes expenses such as fixed management fees, performance-based management fees, administration costs, audit fees, custody fees, trustee fees, bank charges, and taxes. 

Notably, it excludes transaction costs, which in the South African fund context are added to the TER to calculate a fund’s Total Investment Charge (TIC).

The study looks at average fund fee trends through an equal-weighted and asset-weighted lens. 

Dodd’s research showed that, in 2023, the average asset-weighted South African retail fund TER was 1.15%. 

The average asset-weighted TER for active funds was 1.17%, while the same number for passive funds was 0.57%. 

As the South African fund landscape remains dominated by actively managed funds, the overall average is expected to be very close to the average for active funds. 

The graph below shows these average equal-weighted and asset-weighted fund fee trends over time for all South African retail funds and separates out active and passive funds. 

In general, the direction of travel for fund fees over time has been lower. 

However, when comparing the average fund fee trends in South Africa to that of a market like the United States, the decline has been on a much slower trajectory as passive investing is yet to dominate the local market.

Dodd noted the average asset-weighted fund fee for passive funds is higher than that of the average equal-weighted fund fee. 

This suggests that when new passive offerings come to the market, they undercut the incumbent offerings from a fee perspective, and the incumbents have not adjusted their fees in response to this new competition.

While the declining fee trends are generally observable across the different ASISA categories, there are a few interesting observations that can be made in this data –

• Firstly, multi-asset class portfolios cost you more than single-asset class portfolios. This is particularly observable within income funds, where the average South African Multi-Asset Income fund costs significantly more than short-term income funds and bond funds.

• Secondly, local funds remain cheaper. For example, a South African Equity fund costs you less than a Global Equity fund. However, this gap has been closing in recent years as the uptake of lower-cost passive funds has been far greater in the Global Equity category than in the South African Equity category. In addition, the average asset-weighted fund fee in the South African Equity category has seen a notable increase since 2021 as two of the largest funds in the category received more in performance-based fees in the last two years as their respective performance profiles turned around.

• Lastly, investors are voting with their feet regarding investments in more expensively priced funds. Across the ten ASISA categories, an average of 36% of assets are allocated to funds in the two most expensive quintiles. However, lower-cost offerings are growing in popularity across categories such as Global Equity, Worldwide Multi-Asset Flexible and South African Multi-Asset Income.

The difference in fees between various fund classes is shown in the graph below.