Making sense of fees
Historically, the investment industry did a poor job of clearly communicating its fee methodology to investors. How does an investor know they’re getting value for money?
Sangeeth Sewnath, Deputy Managing Director at Ninety One
The fast view
Ninety One is unashamedly an active, global investment manager.
Providing value for money lies at the heart of our fee philosophy.
We need to deliver value (which in our world equates to investment returns) at a cost that is acceptable to our clients.
We agree that fees are an important consideration when choosing a fund, but ultimately, what matters to investors is the returns their funds deliver after fees.
It’s simple to assess whether you’re getting value for your money – the published returns across all funds are always net of fees.
There are costs associated with running any company and in ensuring that what you are building is sustainable into the future. In the case of investment firms, they must charge an appropriate fee to their clients to ensure they have the right people, systems, and processes in place to generate long-term sustainable returns to meet their investment objectives.
Historically, the investment industry did a poor job of clearly communicating its fee methodology to investors. This was exacerbated by the complexity of some of the underlying fee methodologies and a poor understanding by investors of the value chain, which includes the investment manager, investment platform and financial advisor.
Improved transparency across the value chain ultimately improves investor outcomes.
While great strides have been made in the standardisation of how fees are calculated and disclosed, for many investors they remain a puzzling part of the investment equation. However, improved transparency across the value chain ultimately improves investor outcomes, so we thought it opportune to reiterate Ninety One’s philosophy on fees.
But first, we need to take a step back. Ninety One is unashamedly an active, global investment manager. Our goal is to provide compelling long-term investment returns for our clients, which is what has driven us from the outset, more than 3 decades ago. By delivering on that mandate, we have grown to where we are today. We know that if we keep delivering, investors will choose to invest with us. If we don’t, they can just as easily redeem their assets.
Pretium, and why it matters
Providing value for money lies at the heart of our fee philosophy. We need to deliver value (which in our world equates to investment returns) at a cost that is acceptable to our clients. Thousands of years ago, the Romans came up with the Latin word pretium, which incorporates both price and value. It combines the seller’s perception of the product’s value and the buyer’s perceptions of the product’s worth, into one word. The Romans understood that the two are inextricably linked.
Let’s bring this to life using an example: As Figure 1 shows, a 1% fee differential can significantly influence the final capital sum over time. Over 30 years, it could mean the difference between ending with a capital amount of R750 000 versus R1 million. That’s 25%! However, investors need to investigate whether that 1% fee generated net outperformance relative to their target, benchmark, or competitors. If by paying the 1% fee, their investment manager had generated net returns of 2% per annum higher than the target, benchmark or competitors, the investor would have an end value of R1.7 million – 70% higher than the R1 million!
Figure 1: Comparing the impact of fees and value-add
We agree that fees are an important consideration when choosing a fund, but ultimately, what matters to investors is the returns their funds deliver after fees.
Setting our fees
In calculating our fees, we determine the likely levels of outperformance that we expect to generate over suitable investment time horizons. We then set a fee appropriate to these levels of outperformance over time. We further ensure that our fees are sufficiently competitive, relative to our local and global peers. As an aside, our clients pay the same level of fees for mandates regardless of whether they are here in South Africa or based abroad.
What about performance fees?
In response to investor demand, we introduced the option of performance fees on certain funds. These funds typically offer higher levels of potential outperformance (and by the same token, the potential for underperformance). While some advisors and investors prefer the certainty that comes with fixed fees, others prefer performance fees that align interests between investors and portfolio managers. This means that investors incur an increased fee when they benefit from active management skills but pay a passive-like fee on performance in line with or below the benchmark. We are indifferent to which option investors choose, and it is important to emphasise that investors are free to choose their preferred fee class.
We ensure that a highwater mark is maintained in a single share class.
Ninety One uses a rolling performance methodology to determine an appropriate fee for an investor’s actual performance experience. We ensure that a highwater mark is maintained in a single share class. Our performance fees are calculated on returns net of the base fee for any share class. Fee calculations are performed daily looking back at the previous rolling period.
Our benchmarks are based on the outcomes that our funds are built to achieve. For example, the Ninety One Opportunity Fund has a real return objective (to outperform inflation), so its performance target is also based on a real return. Equity funds, on the other hand, are benchmark relative, so the performance fee would have an index hurdle.
Interestingly, when the Opportunity Fund achieves its target of CPI+6%, the fixed fee and performance fee are largely in line – as can be seen in Figure 2, which shows the comparison between fixed and performance fees (ex VAT) for investors in the class available via platforms (used by majority of our retail investors). Over 10 years, the difference between the fixed and performance fee class is only 1 basis point, again reinforcing why we are agnostic on investors’ fee preference.
Figure 2: Comparison between a fixed fee and a performance fee for the Ninety One Opportunity Fund
Note: All fees are quoted per annum and exclude VAT. A-class units are available to investors investing directly.
H-class units are available only via certain LISP platforms. Note that performance fees are calculated net of the relevant A- (or H-) class minimum fees inclusive of VAT. For the Opportunity Fund, rates were calculated using the fee hurdle as benchmark. **Fees are capped at the maximum fee. *The hurdle is calculated using the most recent CPI data available.
At any time, investors are free to switch between the fee classes. No investor is locked in.
Transparency matters
Approximately 90% of fund assets are invested via investment platforms. In the past, investment managers passed a rebate to platforms, which allowed them to then charge a lower fee or pass the rebate on to the client. This caused complexity. We therefore introduced clean fee classes on platforms a decade ago.
We continuously analyse our fees relative to our performance objective and peers, and investors have benefited from fee reductions in recent years. For example, at the time that clean classes were introduced, the average investment management fee for equity and multi-asset funds was approximately 1.50% with a 0.25% rebate, resulting in a net fee of around 1.25%. Today, investors are charged a net fee of between 0.85% and 1%, reflecting a 20-30% reduction. Income funds have benefited from a similar proportional reduction in fees.
What does the future hold?
We believe there will be a clear differentiation between those that continue to outperform their targets and those that don’t. If you’re in the first camp, you’ll likely be able to continue charging close to the current fee. If you don’t, you will either be subjected to significant downward fee pressure, or you will be switched out to a passive fund. As we are unashamedly active managers, we are squarely targeting the outperformance category.
As a side note, passive funds in South Africa currently charge between 0.25% and 0.70%. Sure, they’re cheaper than active funds, but is the value for money there? Globally, passive funds only charge between 0.02% and 0.05%, so we expect significant fee pressure on passive products before they become a truly viable choice in South Africa.
In conclusion, people tend to focus on the here and now, and that is price. For performance outcomes, you need to wait. That is why we believe investors need the help of professional financial advisors to guide their investment decisions. And if the whole concept of fees and charges still has you seeing double, remember just one thing: it’s simple to assess whether you’re getting value for your money – the published returns across all funds are always net of fees.
ENDS
