You will be able to find a fund's yearly costs and explain which parts go to the manager and which to the seller.
Wei Ling has held her Asia equity fund for three years and has never received a bill for it. No monthly deduction from her account, no annual invoice. She assumed that after the sales charge she paid at the start, the fund was free to hold. It is not. She has been paying every day since she bought it, and the payment has been taken out of the price.
This lesson is about those yearly charges: what they are, where to find them, and who receives each part. It builds on lesson 2.1, One-off charges: buying, switching and selling. Figures are examples unless a source is named.
The management fee is what the fund manager charges for running the fund. It is quoted as a yearly percentage of the fund's assets, for example 1.5% a year. You never pay it directly. The fund accrues it bit by bit, usually every dealing day, as a liability, and that liability is subtracted when the NAV is worked out. You saw this in lesson 1.1, A unit trust is a pool you own a slice of: NAV is assets minus liabilities, and the fee owed to the manager is one of the liabilities.
On a holding worth S$10,000 all year, a 1.5% management fee comes to about S$150 a year, roughly 41 cents a day. You do not see the 41 cents leave. You see a NAV per unit that is slightly lower each day than it would otherwise have been. Over years, that small daily shave is the largest cost most fund holders pay.
The management fee is not the only cost of running a fund. The trustee charges a fee for holding the assets and checking the manager. The custodian charges for safekeeping. There are audit fees, legal fees, registrar fees and the cost of printing and sending reports. All of these are paid out of the fund too.
The expense ratio puts these together: the fund's yearly running costs, including the management fee, as a percentage of its average assets. It is usually higher than the management fee alone, sometimes by a little and sometimes by a fair amount for a small fund. Wei Ling's fund, in this example, has a management fee of 1.5% and an expense ratio of 1.75%.
You will usually find the expense ratio in the fund's annual or semi-annual report, and often in the Product Highlights Sheet or the prospectus as a recent figure. The factsheet may show it, or may show only the management fee. If you are comparing funds, compare expense ratios with expense ratios, never one fund's expense ratio with another's management fee.
Here is the part most investors never hear about. A trailer fee is a share of the management fee that the manager pays every year to the distributor that sold you the fund, for as long as you hold it. It is not an extra charge on top. It comes out of the management fee you are already paying through the NAV.
So when Wei Ling pays a 1.5% management fee, the manager might keep part of it and pass part to her bank each year. The split in that sentence is an example: the actual share varies by fund and by distributor. The prospectus usually discloses the trailer fee as a range, given as a percentage of the management fee, and the distributor can tell you what it receives.
Trailer fees pay the distributor for ongoing service, such as reviews and answering your questions. They also give the seller a reason to prefer funds that pay more. Neither of those is a reason to avoid a fund. They are reasons to know the number and ask what you get for it. Lesson 2.3, Same fund, different price: share classes, shows how some share classes are built without a trailer fee at all.
One more cost is usually left out of the expense ratio: what the fund pays to buy and sell its holdings. Each trade carries broker commissions, taxes in some markets, and the gap between buying and selling prices. These come straight out of the fund's assets, and a fund that trades a lot pays more of them.
You will not find this cost on the factsheet. The best clue is the turnover ratio, which measures how much of the portfolio was bought and sold over a year, and is usually reported in the annual or semi-annual report. A low turnover suggests the manager holds positions for years. A high turnover means trading costs are a bigger drag, even though the expense ratio does not show them. Lesson 7.2, Costs the factsheet leaves out, returns to this.
For her own fund, Wei Ling found the management fee in the Product Highlights Sheet, the expense ratio in the latest annual report, and the trailer fee range in the prospectus, in the section on fees paid out of the fund. She wrote each figure down with the page it came from.
In the activity below you will do the same for your fund, noting where each figure appears so you can find it again.
From your fund's documents, write down the management fee, the expense ratio and any trailer fee disclosure, and note where each appears.
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