You will be able to compare share classes of one fund and pick the class that fits how you invest.
Wei Ling searched for her Asia equity fund on a fund platform to compare prices and found six versions of it. Same name, same manager, same holdings, but different letters after the name, different currencies and different NAVs. One of them had a noticeably lower expense ratio than the one she owns. She wanted to know whether she had been sold the expensive version of her own fund.
She may have been. This lesson explains how one fund can come in several versions and how to choose between them.
A fund can issue several share classes: different versions of its units that all own a slice of the same pool of investments, but differ in their charges, the currency they are priced in, how they handle income, or who can buy them. The manager runs one portfolio. The share classes are different ways of owning it.
Because the holdings are the same, the returns before charges are the same too. The differences in what each class earns come from its charges, its currency and its income policy. That makes share classes one of the few places where you can lower your costs without changing your investment at all.
Each class has its own name, usually a letter or code, its own NAV and its own entry in the prospectus. The letters mean different things at different managers, so never assume class A at one firm matches class A at another. The prospectus sets out what each one is.
Some classes keep the income the fund receives, such as dividends and interest, and reinvest it. These are accumulating classes. The income stays inside, so the NAV per unit grows faster and you receive nothing in cash.
Others pay income out to you at regular intervals. These are distributing classes. Some distributing classes pay a fixed rate, and if the fund's income falls short, the payout may come partly from capital. That means part of what you receive is your own money handed back, and the NAV falls by the same amount. The prospectus and Product Highlights Sheet must say whether distributions can come from capital. A high payout on its own does not mean a high return.
For someone like Wei Ling, who is building wealth and does not need the cash, an accumulating class saves her reinvesting by hand. Someone drawing an income might prefer a distributing class, as long as they understand where the payout comes from.
Wei Ling's fund keeps its accounts in US dollars, as she found in lesson 1.4, Trace one fund from your money to its holdings. It offers classes priced in US dollars and in Singapore dollars. An unhedged Singapore dollar class simply converts the NAV, so her returns in Singapore dollars still rise and fall with the exchange rate.
A currency-hedged class uses contracts to reduce the effect of exchange rate moves between the class currency and the fund's currency. Hedging has a cost. Part of it is the cost of the contracts, and part depends on the interest rate gap between the two currencies, which can help or hurt. The prospectus describes how the hedging works and that its costs are borne by that class. Hedging can also reduce gains when exchange rates move in your favour. Whether it suits you is a question about how much currency risk you want, which the course Build and run an ETF portfolio covers in more depth.
The cheapest class is often what is called a clean class: a share class with no trailer fee built into its management fee. Because the manager is not paying a distributor out of the fee, the management fee is lower.
Clean classes are usually sold through fund platforms or advisers who charge you directly, through a platform fee or an advice fee, instead of being paid by the manager. So the lower expense ratio is not the whole comparison. You have to add whatever the platform charges you and compare the total with the class that has a trailer fee built in. Module 3 does that comparison properly.
Some classes are open only to institutions or to investors putting in large sums. Robo-advisors sometimes use these, as you will see in module 4. If a class you want is not offered by your bank or platform, you cannot buy it there, however cheap it is.
Here is Wei Ling's comparison, with figures made up for the example. Class A in Singapore dollars, accumulating, unhedged, expense ratio 1.75%: the one she owns. Class A in Singapore dollars, hedged, expense ratio 1.78%. Class A in US dollars, distributing, expense ratio 1.75%. A clean class in Singapore dollars, accumulating, unhedged, expense ratio 1.00%, available only on platforms.
Set out side by side, the choice is clearer. The clean class costs less in the fund, but she would have to move to a platform and pay its fee. Laying your own fund's classes out in one table, with expense ratio, currency and dividend policy in columns, is the activity below.
List the share classes available for your fund and compare their expense ratios, currencies and dividend policies in one table.
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