You may be asking
yourself what "TER" is and, more
importantly, what it means to us
as investors. "TER" is the acronym
for "Total Expense Ratio" and it
came into effect on 1 May 2007.
The "TER" of "a portfolio is a measure
of the portfolio's assets that was
relinquished as operating costs
expressed as a percentage of the
daily average value of the portfolio
calculated over a period of time."
This is the definition given by
RMB in a recent article. In essence,
the objective of "TER" is to reflect
all costs (including various running
costs) that impact on the price
of a unit trust fund. It is now
mandatory for all domestic unit
trust fund fact sheets to reflect
the "TER" of a fund. This has been
brought about by the Association
of Collective Investments in the
interests of enhanced transparency
and greater client awareness - a
move that we welcome.
The following are the types of fees
that will be included in the "TER"
of a fund – management fees (including
performance fees), administration
costs, custody fees, trustee fees,
audit fees, bank charges, taxes,
stamp duty, net negative interest
charges (where there may have been
an overdraft), costs incurred in
the disposal of assets and the cost
of purchasing assets. Please note,
however, that the "TER" of a fund
is not limited to these fees. The
initial fee and annual advice fee
paid to the financial advisor will
not automatically be included. "Brokerage
and expenses related to the settling
of transactions and taxes on these
items (eg. Vat on Brokerage and
UST) does not form part of the TER".
Despite every effort to provide
greater transparency, comparing
the "TER" of one fund to the "TER"
of another may not always be comparing
like with like. One example of this,
which is pointed out in the paragraph
above, relates to the annual advice
fee paid to the financial advisor.
Certain fund management houses include
this annual advice fee in their
quoted annual management fee for
the fund. However, there are some
funds where the annual advice fee
paid to the financial advisor is
in addition to the annual management
fee levied on the fund – in these
cases the annual advice fee will
not form part of the "TER". We therefore
need to be aware of these factors
when comparing funds according to
their "TER's". The introduction
of "TER" has not served to increase
the fees being levied on unit trust
funds – it is simply a more comprehensive
way of listing underlying fees being
levied within the fund. These fees,
which have always been there, are
now being set out in greater detail
in a way that is easier for investors
to understand. This is certainly
a step in the right direction.
Source: RMB Asset
Management Total Expense Ratios
(TER) Educational Pack
The Federal Reserve
kept interest rates on hold at 5.25%
in May, for the seventh consecutive
meeting. Commenting after the announcement,
the Federal Reserve stated "the
predominant policy concern remains
the risk that inflation will fail
to moderate as expected." In addition,
"future policy adjustments will
depend on the evolution of the outlook
for both inflation and economic
growth." Commenting after the Fed
statement, Brian Stine of Allegiant
Asset Management Co said "it sounds
like everything is on course for
a Goldilocks scenario. The Fed is
probably on hold for the foreseeable
future. This is a transition period
for the economy. There is no urgency
to cut rates anytime soon."
First quarter economic growth came
in below forecast at 1.3%, disappointing
analysts. "A slumping housing market
and weak trade" were primarily responsible
for this poor performance. Consequently,
growth forecasts for the second
quarter have been revised down to
an annual rate of 2.4%, from 2.7%.
Forecasters, however, do expect
economic growth to improve later
this year and to average between
2% and 2.9% for the year. Growth
in 2006 was recorded at 3.3%. Unemployment
is expected to improve to 4.6% in
2007, which is marginally better
than 4.7% last year.
As expected, the European Central
Bank (ECB) raised interest rates
by 0.25% in March. This raises rates
in the region to 3.75%, the highest
level recorded in five and a half
years. Rates were left on hold for
the remainder of the quarter under
review, but are expected to rise
again. Inflation remains a concern,
with the ECB president reiterating
after the May meeting that "strong
vigilance" is required in the fight
against inflation. In addition he
commented that "monetary development
continues to require very careful
monitoring particularly against
the background of solid expansion
in the economic activity and still
strong property market developments."
Following these comments, the market
is expecting rates to increase to
4% in June, with some analysts saying
that they wouldn't be surprised
if rates increased to levels of
4.5% by mid next year.
Growth remains robust, with the
consensus forecast for 2007 being
2.5%, declining slightly to 2.4%
in 2008. Increased business investment,
which in turn has served to boost
business confidence in the region,
is cited as being one of the main
drivers of economic growth. As a
result, increased employment levels
have boosted household consumption.
 |
Interest rates, while unchanged
at the March and April meetings
of the Bank of England (BoE), were
increased by 25 basis points to
5.5% in May. This raises the borrowing
rate in the UK to its highest level
in six years. Inflation and consumer
spending remain the primary reasons
for the increase. Inflation reached
a high of 3.1% in March, before
declining to 2.8% in April on the
back of lower gas and electricity
prices. Opinions are divided as
to whether a further rate increase
will be necessary in this cycle.
Some are of the opinion that the
most recent increase is "enough
for now", while others feel that
the "future belt tightening from
consumers would be needed in order
to avoid future rate rises." Commenting
on inflation, Peter Spencer, chief
economic advisor to the Ernst &
Young ITEM Club said "big cuts in
gas and electricity prices are now
coming through and we can be confident
that CPI inflation will fall back
towards the 2% target. That will
give the bank some breathing space."
Following the latest producer price
figures that rose by less than expected,
many analysts are hoping that the
BoE will adopt a wait-and-see approach
on inflation, rather than increasing
rates again possibly as soon as
June.
Tony Blair announced in May that
he would be stepping down on June
27th. Gordon Brown is currently
the leading contender to take over
as prime minister of Britain. Commenting
at his campaign launch at the Imagination
Gallery in Britain on the 11th May,
Mr Brown said "in the weeks and
months ahead, my task is to show
I have the new ideas, the vision
and the experience to earn the trust
of the British people." Although
Gordon Brown faces a challenge from
some left-wing candidates, "there
appears to be a coordinated effort
among Labour MPs to unite behind
him, with Blairite MPs Stephen Byers
and Alan Milburn also expected to
back him."
The Bank of Japan (BoJ) raised interest
rates by 0.25%, resulting in rates
doubling to 0.50% in February. This
is the second interest rate increase
in the region in six and a half
years, with the first being in July
last year. Official figures show
that one of the key investment indicators
– machinery orders – are increasing
steadily. This supports the view
that the economic recovery in Japan
is corporate driven rather than
consumer driven at present. The
BoJ have made it clear that future
increases in interest rates would
by gradual. The current view is
that changes are unlikely to be
made to interest rates until at
least the third quarter of this
year.
Capital expenditure in the region
continues to improve, being driven
in part by increased orders from
the real estate sector. In addition,
improving employment levels are
having a positive impact on consumer
confidence, thereby improving consumer
spending in the region.
The International Monetary Fund
(IMF) has forecast economic growth
of 2.3% in Japan for 2007, placing
Japan slightly ahead of the USA
(after revising the growth forecast
in the USA down to 2.2%). However,
the IMF estimates that in 2008 growth
will slow to 1.9% in Japan, resulting
in the region once again falling
behind the USA.
The Reserve Bank (SARB) made no
changes to domestic interest rates
during the quarter under review.
As a result the Prime Lending Rate
and the Repo Rate remain at 12.5%
and 9%, respectively.
The market was divided about whether
the SARB would increase interest
rates at their June meeting, until
the release of the April CPIX figures
on the 30th May. The CPIX figure
shocked the market, coming in well
above forecast at 6.3%, breaching
the upper level of the target band
for the first time. CPIX is now
at its highest level since August
2003. CPIX for April was forecast
to rise to 5.9%. Commenting on the
latest figure, Investec economist
Annabel Bishop has cited the " 68c/l
hike in the petrol price and rising
food price inflation" as the main
drivers of the most recent inflation
number. She went on to say that
"this supports our view that interest
rates will be hiked by 50 basis
points at the June 2007 MPC meeting,
as second round effects from the
current steady rise in CPIX inflation
are also starting to emerge given
recent wage demands of a 12 percent
increase [double the upper limit
of the inflation target range]."
Mike Schussler, an economist at
T-Sec, stated that the inflation
number was "a shocker" and is of
the opinion that interest rates
will need to rise more than once.
Data released recently showed that
"private credit demand slowed to
an annual rate of 24.2% in March,
notably down from a peak of 28.6%
in October." Despite this improvement,
however, the SARB remain concerned
that credit extension remains "uncomfortably
high." It is interesting to note
that at the SARB review meeting
in May, the Bank left its inflation
forecast unchanged. They also stated
at this meeting that the inflation
outlook had shown "some deterioration"
– the same words used in April.
Recent figures released by the Bureau
for Economic Research (BER) forecast
that GDP growth is expected to reach
4.8% this year, increasing to 5%
next year. These forecasts were
revised up from earlier GDP growth
forecasts of 4.5% for 2006 and 2007.
According to the BER "previous expectations
of a more constraining growth environment
have thus far not materialised."
It is reported that, over the next
three years, the government intends
to spend some R410bn on infrastructure
in an attempt to increase the annual
growth rate to 6% by 2010. According
to figures released by Statistics
SA at the end of May, first quarter
GDP came in slightly below expectations
at 4.7%.
GENERAL – OIL AND GOLD
The oil price rose sharply to end
the quarter at $67.89 a barrel,
from $59.34 per barrel at the end
of February. Supply disruptions
in Nigeria continue to put upward
pressure on prices. Militant attacks
in the region have "now shut off
about 900 000 barrels per day, or
about 30% of supply capacity from
the world's eighth-largest oil exporter."
Another issue putting pressure on
prices is the concern caused by
nuclear work being undertaken in
Iran. According to the IRNA news
agency "Teheran's chief nuclear
negotiator Ali Larjani and European
Union foreign policy chief Javier
Solana will meet on May 31 for a
new round of talks on Tehran's nuclear
programme." In addition, it is reported
that Russia has "slashed its 2007
oil and gas output forecast by 9.4%
due to project delays, taking total
oil production to about 2,6-million
barrels per day this year, down
from 2,8-million last year."
Gold lost some of its shine, ending
the quarter under review at $660.55
an ounce compared to $671.95 at
the end of the previous quarter.
Renewed buying activity took place
in mid May, following two month
price lows earlier in the month
as a result of renewed Dollar strength.
Gold has unsuccessfully tested the
$700 level three times this year.
CONCLUSION
I am sure that everyone who attended
the presentation hosted by Finlaw
with Coronation Fund Managers on
the 21st May found it both interesting
and informative. If you weren't
able to attend, but would like to
discuss the topics covered, please
contact our office and we shall
gladly discuss the salient points
raised in the presentation with
you. As promised last quarter, we
shall confirm the date for the offshore
seminar that Sarasin will be presenting
to Finlaw clients closer to the
time. This presentation is still
expected to take place in either
September or October.
Please note that the new deadline
for the submission of personal income
tax returns has now been extended
to 31 October 2007. It is expected
that the IT12 tax forms will be
mailed out to taxpayers in June
or July.
