In recent years there have been numerous articles on lowering investment costs by means of Exchange Traded Funds (ETFs) and other index-tracker portfolios. Despite all the noise South African investors have not followed the international trends of implementing large portions of their savings using these types of portfolios. There are a number of reasons for this:
- Most of the available index type portfolios were exposed to only one asset class, for example ALSI or Top 40 tracker funds are only exposed to equities. The South African retirement regulations changed a few years ago and now require member-level compliance with Regulation 28 of the Pension Funds Act which means that most financial plans are implemented using multi-asset portfolios like balanced funds.
- The vast majority of index-type portfolios that were available over the past 10 years have been ETFs which could not be accessed via Linked Investment Service Platforms (LISPs) and therefore could not be implemented into financial or retirement plans effectively.
The challenge for South African investors has therefore been a shortage in suitable and investable portfolio options rather than a lack of interest in index tracker funds.
The Nedgroup Investments Core Range was launched in 2009 and aims to fulfil the need for simple, low- cost, multi-asset unit trust portfolios that can be easily incorporated into a financial planning process and blended with active multi-asset unit trust portfolios.
The range consists of:
Both unit trust portfolios comply with Regulation 28 of the Pension Funds Act and can be used for retirement funds, preservation funds, endowments as well as retirement and living annuities. The portfolios can be accessed via investment platforms (LISPs) and umbrella funds.
Below are some of the key features of these unit trust portfolios and how they solve some of the challenges in implementing a cost efficient portfolio.
- Low overall expenses
The Total Expense Ratio (TER) of the Nedgroup Investments Core Range is currently 0.47% p.a. which is nearly 1.2% p.a. less than the TER of the average active balanced portfolio¹ . This TER includes the asset management fee of 0.40% p.a. (including VAT), collective investment scheme expenses and the TERs of the underlying offshore exposure through global ETFs.
The cost disclosed within the TER is however not the only expenses incurred in managing a portfolio. Frictional costs such as the brokerage fees and taxes (STC and STRATE) to purchase investment instruments must also be considered. These transaction costs are not currently disclosed but will have to be displayed from 1 April 2016 and will be called the portfolio’s Total Cost Ratio (TCR).
The current TCR of the Nedgroup Investments Core Range is only 0.09% p.a. which is the same as an active portfolio that is nearly a 100 times bigger². As portfolios get bigger their fixed costs, such as the collective investment scheme fees reduce dramatically and since new inflows are small compared to the portfolio’s total size, the transaction costs also reduce. In general, index -type portfolios will have lower TCRs than active portfolios as they buy-and-hold shares that make up indices and don’t trade actively.
- Simple, multi-asset class exposure
The Nedgroup Investments core portfolios are highly diversified and provides exposure to five domestic and five offshore asset classes (equity, property, bonds, inflation-linkers and cash). In line with these portfolios’ low cost philosophy, the local asset class exposure is achieved by following indices which are tailored to provide prudent and balanced exposure to their respective investment universes. Offshore expenses are kept to a minimum by using global ETFs for the global asset classes. The strategic allocations to these asset classes are constructed to maximise the likelihood of meeting the portfolios’ real return objectives over their stated investment horizons.
- Easily incorporated into a financial or retirement planning process
The Nedgroup Investments Core Range caters for different real return requirements and can therefore be directly implemented into a financial or retirement plan. They are suitable for pre- and post-retirement purposes, for example you can use them for your preservation funds or retirement and living annuities. They can be used for discretionary investments and will also be accessible via the new tax-free savings accounts. Institutional pension schemes can also use them and if required implement within a life-stage strategy.
- Easily blended with active funds
The Nedgroup Investments Core Range portfolios can be used as stand-alone solutions or as low cost cores in Core Active™ strategies. In a Core-Active™ strategy a low cost core portfolio is blended with traditional active multi-asset funds to lower overall expenses while still retaining some of the benefits of active portfolio management.
- Scale and track record
The Nedgroup Investments Core Diversified Fund was launched in August 2009 and the Nedgroup Investments Core Guarded Fund was launched in January 2010. Both portfolios have built up solid track records over the past five years and have delivered on their real return objectives and done well compared to their peers. The portfolios have achieved scale (over R1 billion in each portfolio) so that they can be cost effectively managed at acceptable tracking errors.
The Nedgroup Investments Core Range fulfils the need for suitable and investable low-cost portfolios that can be easily incorporated within your current financial plan to lower overall expenses while retaining your current real return objectives. The reduction in TER by 1.2% p.a. compared to the average active balanced portfolio can have a significant impact on your investment return in the long run.
¹ See ‘A Core-Active™ approach to retirement planning’, Q2 2014 Quarterly newsletter.
² The Allan Gray Balanced Fund discloses its TCR as 0.09% and has a fund size of over R100 billion as at 31 December 2014.