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
| REGIONAL COMMENTARY UNITED STATES OF AMERICA |
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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.
| EUROPE |
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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.
| UNITED KINGDOM |
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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.”
| JAPAN |
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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.
| SOUTH AFRICA |
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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.
“Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund.”
Oscar Wilde
