Paying the High Price of Active Management: A New Look at Unit Trust Fees

Abstract

This study attempts to allocate the fund management expenses of actively managed South African general equity unit trusts between active and passive management portions, thereby calculating the implicit cost of active management. The active expense ratio of a unit trust can be calculated by using the published total expense ratio (TER) of the unit trust, its correlation relative to its benchmark and the expense ratio of a comparable exchange traded fund (ETF) tracking the benchmark of the unit trust.

This study focuses on actively managed South African equity unit trusts available to the retail investor for the period March 2007 to February 2015. The active expense ratios of these unit trusts were calculated on the basis of a three-, five- and eight-year analysis period.

It was found that the mean active expense ratios of the South African unit trust sample amounted to 4,14%, 4,29% and 4,25% respectively in the case of the three-, five- and eight-year periods. The comparable mean reported TERs amounted to 1,60%, 1,61% and 1,61% respectively. Thus the mean active expense ratio is more than 150% higher than the comparable mean reported TER in each period.

A similar study was conducted by Miller (2010), investigating the active expense ratios of actively managed large cap American unit trusts. He found that the mean active expense ratio was 6.44%, compared with a mean TER of 1.20%. However, due to a higher degree of active management being employed by South African managers, the active expense ratios are lower than those of the American counterparts.