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FULCRUM FEES – HOW THEY WORK

How much does a unit trust investment cost? Understanding the fee structure is an important consideration for any investment. DIANE BEHR takes a closer look at Foord’s fulcrum fees.

Regulation strictly controls VAT-inclusive expenses, called permissible deductions, charged against unit trust portfolios. These are limited to the service charge, audit fees, brokerage costs and bank and settlement charges. The lion’s share of these costs is the manager’s service charge, which compensates the unit trust manager for the costs of scheme administration, including fees paid to the investment manager.

The Total Expense Ratio (TER) is a measure of each portfolio’s total expenses over the past three years, expressed as an annualised average of the fund’s market value. It includes all permissible deductions of the fund and underlying funds. It is a useful guide to historic costs but should be considered relative to performance if the fund charges performance fees.

Most Foord funds charge service fees based on the funds’ performance relative to the benchmark return. The fees are typically structured as fulcrum fees, with fee rates increasing with outperformance and decreasing with underperformance around the at-benchmark (the fulcrum) fee rate. In our view, fulcrum fees align investor and manager objectives by rewarding the manager for good performance and penalising it for poor performance.

The service fee is deducted from the unit trust price each day. The charge is calculated by applying the daily fee rate to the market value of the fund. For performance classes, the daily fee rate varies based on relative performance over a specified period. Foord’s fulcrum fees calculate relative performance over rolling one-year periods for retail fund classes.

Performance fee rates are not capped because outperformance is never earned smoothly. And because fees reduce the fund’s return, the base fee and all performance fees must effectively be recouped before another performance fee can be charged in the rolling one-year period. The minimum service charge in most Foord retail fund classes is 0.5% plus VAT per year.

As an example, and ignoring VAT, assume a Foord fund with an at-benchmark fee of 1% per annum achieves a one-year net-of-fee return of 10% when the benchmark return was 8%. The resulting outperformance is 2%. If the performance fee sharing rate is 10%, the performance adjustment is +0.2%. The service charge rate would be 1% plus the 0.2% performance adjustment, bringing the total to 1.2%. This result is divided by 365 to convert it to a daily rate, which is applied to the market value of the fund.

Similarly, if the fund’s return was 10% and the benchmark return was 3% higher, the fund would have suffered underperformance of 3%. The performance fee adjustment would then be -0.3%, reducing the 1% at-benchmark fee to 0.7%.  

In addition to Foord’s service charge, fees may accrue in the Foord global funds which are underlying holdings in some Foord funds.

Please refer to the monthly fact sheets for details of all applicable fee rates.

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