By Michael Dodd, Senior Fund Analyst at Morningstar SA
South African investors witnessed a continued decrease in fund fees in 2023. This downward trend in fund fees is evident not only in South Africa but also in global markets. Various factors, such as the rise of passive investing, heightened competition among asset managers, and changes in the economics of advice, have contributed to the reduction in fees both locally and internationally. As a result, investors have benefited from these developments by saving money on fund fees.
This study examines the trends in South African fund fees up to December 2023, focusing specifically on retail share classes. It excludes share classes that are not easily accessible to all investors, such as institutional or platform-specific classes. The Total Expense Ratio (TER) is used as the measure for South African fund fees, encompassing expenses like management fees, administration costs, and audit fees, among others.
The study explores average fund fee trends using both equal-weighted and asset-weighted approaches. Asset-weighted average fees, which reflect the fees paid by investors, are typically lower than equal-weighted average fees due to economies of scale enjoyed by larger funds.
Fees continued to decline in 2023
In 2023, the average asset-weighted TER for South African retail funds was 1.15%. Active funds had an average asset-weighted TER of 1.17%, while passive funds stood at 0.57%. Given the predominance of actively managed funds in the South African market, the overall average TER closely mirrors that of active funds.
Analysis in Exhibit 1 depicts the trends in average equal-weighted and asset-weighted fund fees for South African retail funds, distinguishing between active and passive funds. While fees have been steadily decreasing over time, the pace of decline in South Africa has been slower compared to markets like the United States.
Interestingly, the study highlights that the average asset-weighted fund fee for passive funds is higher than the equal-weighted fee. This suggests that new passive offerings are charging lower fees than existing options, prompting incumbents to potentially respond with fee adjustments.
Multi-asset class funds remain the priciest fund categories
Exhibit 2 showcases the average asset-weighted fees across Morningstar’s Global Broad Category Groups, focusing specifically on Equity, Fixed Income, and Allocation funds. Due to regulatory requirements, Allocation funds hold a significant market share in South Africa. Actively managed Allocation funds are the most expensive category, with an average asset-weighted TER of 1.39%. Active Equity funds follow closely at 1.35%, while Passive Equity funds have an average asset-weighted TER of 0.61%. Fixed Income funds generally have lower fees, with Active Fixed Income funds registering an average TER of 0.75%.
Further breakdowns in Exhibits 3 and 4 examine fee trends at the ASISA category level for the ten largest fund categories (excluding Money Market funds) over the past five years.
While fee trends show a decline across ASISA categories, some key observations emerge from the data:
- Multi-asset class portfolios are generally more expensive than single asset class portfolios, particularly evident in income funds where Multi-Asset Income funds cost markedly more than Short-Term Income and Bond funds.
- South African Equity funds are cheaper than Global Equity funds, with the gap narrowing as passive funds gain popularity in the Global Equity category. Notably, the average asset-weighted fee in the South African Equity category has increased since 2021 due to performance-based fees.
- Investors show a preference for lower-cost funds across ASISA categories, with an average of 36% of assets allocated to funds in the two most expensive quintiles. Categories like Global Equity and South African Multi-Asset Income see strong support for lower-cost offerings.
Conclusion
Fund fees are a critical factor in fund selection, and Morningstar emphasizes price as a key consideration. While lower fees are generally beneficial for investors, it’s essential to consider other factors like net-of-fee performance when evaluating fund value. Higher fees can significantly impact investor outcomes over time, and Morningstar’s research supports the idea that fees influence long-term fund performance. Encouragingly, this study shows that South African fund fees are aligning with global trends, with a positive direction of lower fees benefiting investors.