COSTS MATTER MORE IN A LOW RETURN CLIMATE

In this low investment return climate, unit trust investors ought to keep a close eye on the expenses incurred by their fund managers.

With returns already facing a tight squeeze, high fund costs can have an adverse effect on the performance of a fund.

If a fund has an annualised gross return of, say 5% (after front end fees), and the annualised expense ratio is 2%, the effective return is only 3%. The higher the expense ratio the lower the effective return of a fund.

Over the years as Singapore's fund industry developed, there have been calls from investors for fund expenses to go down. Some changes have taken place.

Since 1 July 2002, a fund's marketing and advertising expenses can no longer be charged to the fund. And to raise the level of transparency on what goes into the calculation of expense ratios, the Investment Management Association of Singapore (IMAS), a society formed by investment professionals, has set guidelines on what goes into a fund's expense ratio.

Accordingly, expenses should be included if it relates to the "ongoing management and operation of the fund." These figures should be annualised and expressed as a percentage of the fund's net asset value.

Some examples of fees to be included in the expense ratio are management fees, trustee fees, registrar fees, custodian fees, accounting and valuation fees, and legal fees.

Management fees usually forms the bulk of expense ratios. For an equity fund, management fees are approximately 1.25% to 1.5%, while that for a bond fund is usually lower.

Even as fund managers try to tackle the problem of not over-charging investors, they have to face another bigger problem today - falling investment returns.

Over the past three years, the MSCI World Index has lost 16% in US dollar terms as at 22 April 2003. In the last one year, the index is down by 17%. Adding more pain to the losses, investors who bought funds with higher expense ratios will suffer more as they are paying higher costs on a loss-making investment.

When times are good, investors tend to forgive high expenses more easily. But when returns are negative or largely in the single digits, investors ought to become aware of what eats into a fund's bottom-line.

Expenses increase proportionately when the fund size declines. Certain costs like legal fees are fixed regardless of how big or small the fund size is. Economies of scale start to kick in when a fund reaches a critical size. A fund manager may decide to absorb some fund costs to avoid over-charging customers but how long this can be continued under tough times such as now is open to question.

As at end of 2002, Standard & Poor's CPF funds' expense ratios tabulation revealed that global fixed income funds' expense ratios averaged 1.32%, while that for global equity funds was 2.17%. The highest expense ratio in the fixed income category was 1.72% against 5.72% for equity funds.

In S&P's latest expense ratio table, as at end 31 Mar 2003, some equity funds had expense ratios ranging from 6% to almost 10% (see table below). Among the CPF funds in finatiQ's stable, the ABN AMRO Star Behavioural Finance Japan Fund had the highest expense ratio of 9.92% ending 31 Mar 2003. This was a rise compared to a ratio of 6.99% ending 31 Dec 2002.

However, note that the expense ratio is not complete and does not capture all expenses that are charged to investors. It excludes certain items like brokerage and transaction costs, performance fee, and bank lending costs, all of which are not part of the expense ratio but may still charged to unit trust investors.

Investors who are interested in finding out what their fund's expense ratio is should take a look at the annual and semi-annual reports, which are available from the fund manager.

Cheapest CPF Funds*

Fund	Expense ratio	Expense ratio date	Expense ratio	Expense ratio date
COM Singapore Bond Fund	0.50*	30 Aug 02	0.5	28 Feb 03
Henderson Global Bond A Fund	0.11*	28 June 02	0.56	31 Dec 02
Deutsche Lion Bond Fund	0.73	31 Dec 02	0.73	31 Mar 03
COM Global Infotechnology Index Fund	1.08*	30 Aug 02	0.93	28 Feb 03
DBS Shenton Thrift Fund	1.19	31 Dec 02	1.03	31 Mar 03

Most Expensive CPF Funds*

Fund	Expense ratio	Expense ratio date	Expense ratio	Expense ratio date
ABN AMRO Star Behavioural Finance Japan Fund	6.99	31 Dec 02	9.92	31 Mar 03
Dresdner Intl Prov Global Software	6.11	31 Dec 02	6.83	30 Mar 02 - 31 Mar 03
Dresdner Intl Prov Global Biotech	5.47	31 Dec 02	6.2	30 Mar 02 - 31 Mar 03
DBS Mendaki Global	5.72	31 Dec 02	6.18	31 Mar 03
Dresdner Intl Prov Global Multimedia	5.11	31 Dec 02	5.75	30 Mar 02 - 31 Mar 03

Source: S&P

* Only covers the universe of CPF funds in finatiQ's stable