Price is what you pay. Value is what you get.¹

Unpacking the Total Investment Charge (TIC) of funds and why you shouldn’t look at costs in isolation

Sep 2, 2021

6 minutes

Paul Hutchinson
Unpacking the Total Investment Charge (TIC) of funds and why you shouldn’t look at costs in isolation

The introduction by the Association for Savings and Investment SA (ASISA) of the Total Investment Charge (TIC) as a measure that allows investors and advisors to assess the impact of all charges and expenses incurred in the management of unit trusts, has improved transparency and fee comparability. Importantly though, while the TIC is a relatively new disclosure requirement, the underlying charges and expenses have always been levied and therefore unit trust fund performance has always been after the impact of these charges and expenses.

What is the TIC?

Essentially, the Total Investment Charge is the sum of a fund’s Total Expense Ratio (TER), i.e. any expenses incurred in managing the fund – e.g. fixed (and performance, if applicable) management fees, administration costs, custody fees, trustee fees, audit fees, bank charges etc. – and the fund’s Transaction Costs (TC), i.e. the costs incurred in the buying and selling of the assets in which the fund invests (e.g. brokerage, VAT, Securities Transfer Tax, etc.).

While funds that charge the same annual management fee have similar TERs, their TCs can vary widely. This has raised some interesting questions relating to price paid versus value received.

Consider the TCs for the Ninety One Opportunity and Managed Funds, which are both balanced (multi-asset high equity) funds:

Ninety One Opportunity Fund = 0.02%
Ninety One Managed Fund = 0.81%

Does this mean that the Ninety One Opportunity Fund is a better investment solution for investors? The short answer is no; it is just different!

Understanding different investment philosophies and their impact on TCs

Portfolio managers apply different investment philosophies to managing money, be it Growth, Value, Earnings Revisions, Price Momentum or Quality. While Value and Growth are the more recognisable and better understood investment styles, each has its own unique approach to analysing and selecting assets. Importantly, each approach also impacts on how frequently or infrequently the portfolio manager buys and sells assets and thereby incurs transaction costs on behalf of the fund.

It is our view, therefore, that TCs be considered as part of the investment pillar decision, not the cost pillar. This is the approach taken by many UK fund selectors who recognise that portfolio managers should not be deselected because the way they manage money results in higher TCs, especially where the performance track record is attractive relative to lower TC solutions.

Cash iconValue investors actively seek stocks they believe the market has undervalued, i.e. stocks are selected that trade for less than their intrinsic value.

Growth iconGrowth investors invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios.

Portfolio iconEarnings Revisions investors invest in companies where the expected future earnings are being revised upwards.

Benchmark iconPrice Momentum investors seek to take advantage of the continuance of existing trends in the market, i.e. by investing in an asset that has an upward trending price.

Medal iconQuality investors invest in companies with outstanding quality characteristics – these companies have hard-to-replicate enduring competitive advantages that create barriers to entry, enabling such companies to sustain high levels of profitability over the long term.

The Value and Quality investment styles are more ‘buy-and-hold’ in nature. Funds that are managed accordingly e.g. the Ninety One Value and Opportunity Funds respectively, tend to have low(er) turnover ratios (as low as 15–20% p.a. for Ninety One Opportunity) and hence lower TCs. On the other hand, Growth, Earnings Revisions and Price Momentum are all styles which tend to demonstrate an active trading approach, where actively changing the fund as and when market conditions (growth prospects, future earnings or trends) change, is a key contributor to long-term returns. Funds managed according to one of these styles tend to have above-average turnover ratios and therefore above-average TCs.

Investment panacea?

Importantly, there is no single route to investment success, and a higher or lower TC is not a determinant of long-term fund outperformance.

The following risk/return scatterplot (Figure 1) illustrates that over the long term investing using either an Earnings Revisions (Ninety One Managed) or a Quality (Ninety One Opportunity) philosophy would have delivered similar above-average returns. It is the return series path, i.e. how they get there that differs. Figure 2 shows how the different styles behave over time.

Figure 1: Risk versus return scatterplot: 1 January 2003 to 31 July 2021, being the common period that Gail Daniel and Clyde Rossouw managed the Ninety One Managed and Opportunity Funds respectively

Risk versus return scatterplot

Source: Morningstar as at 31.07.2021. Returns are calculated on a NAV-to-NAV basis, net of A-class fees, with gross income reinvested. Market indices are gross of fees. Highest and lowest 12 month rolling performance since inception is: Ninety One Opportunity = 43.8% and -15.7% respectively, and Ninety One Managed = 47.2% and -23% respectively.

There is no single route to investment success.

Figure 2: Extreme market conditions give a sense of how different styles behave 2008 crash, 2009 recovery market inflection points

Extreme market conditions give a sense of how different styles behave 2008 crash, 2009 recovery market inflection points

Source: Citi Research, Ninety One, Period = January 2007 to December 2009; Long-short style portfolios.

Independent supporting evidence

The results of Schroders' research, which challenges the myth that global portfolio turnover produces poorer outcomes for investors due to the additional costs it incurs, support our view articulated above.2

Schroders concludes: “Our analysis suggests that the presumption that turnover and transaction costs are to the detriment of investors is misguided as it fails to consider whether these costs lead to better or worse outcomes. We find that, on average, high turnover US equity managers have been able to add at least enough value to offset the additional transaction costs they are exposed to. There is no evidence of a significant relationship between turnover and excess returns. What is surprising is that this is true even in small caps where the costs of trading are noticeably higher.”

The value of independent investment advice

In conclusion, a lower TC does not imply nor result in a better investment outcome. It is essential that advisors and investors confirm that a fund delivers performance over time consistent with its investment mandate and the fund manager’s investment philosophy, remembering that the style directly impacts the fund's TC.

Given the importance of making the correct decision, we strongly recommend that investors seek professional investment advice, tailored to their individual circumstances.

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1 Benjamin Graham, The Intelligent Investor, 1949.
2 Schroders, Churn is not necessarily burn: debunking the myths of portfolio turnover, July 2017.

We believe in the importance of independent and qualified financial advice. A professional financial advisor can help you set realistic financial goals, plan towards those and partner with you as you adapt to changing needs and circumstances.

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Authored by

Paul Hutchinson
Sales Manager

Important information

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security.

Collective investment scheme funds are generally medium to long term investments and the manager, Ninety One Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant TER. Additional information on the funds may be obtained, free of charge, at Ninety One SA (Pty) Ltd (“Ninety One SA”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA).

Investment Team: There is no assurance that the persons referenced herein will continue to be involved with investing for this Fund, or that other persons not identified herein will become involved with investing assets for the Manager or assets of the Fund at any time without notice.

Investment Process: Any description or information regarding investment process or strategies is provided for illustrative purposes only, may not be fully indicative of any present or future investments and may be changed at the discretion of the manager without notice. References to specific investments, strategies or investment vehicles are for illustrative purposes only and should not be relied upon as a recommendation to purchase or sell such investments or to engage in any particular strategy. Portfolio data is expected to change and there is no assurance that the actual portfolio will remain as described herein. There is no assurance that the investments presented will be available in the future at the levels presented, with the same characteristics or be available at all. Past performance is no guarantee of future results and has no bearing upon the ability of Manager to construct the illustrative portfolio and implement its investment strategy or investment objective.

The fund is a sub-fund in the Ninety One Global Strategy Fund, 49 Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, and is approved under the Collective Investment Schemes Control Act.

In the event that specific funds are mentioned please refer to the relevant minimum disclosure document in order to obtain all the necessary information in regard to that fund.

This presentation is the copyright of Ninety One SA and its contents may not be re-used without Ninety One SA’s prior permission.