Multiple Classes of Units
South African investors now have a large range of locally registered collective investment portfolios to invest in, not to mention the ever-increasing number of offshore funds that are registered for local distribution. In addition, some local management companies have launched multiple classes of units, bringing our industry in line with other countries. What are multiple classes of units, and how do they impact the investor?
What are Multiple Classes of Units?
Very simply, multiple classes of units means that one portfolio, offered by one management company, may have two or more classes, charging varying annual fees. In other words, different annual fees are charged for the same portfolio with the same underlying assets. The different classes are sold to different types of investors (retail and institutional), and are usually based on different minimum investment amounts.
Initial charges and annual fees
Before the introduction of multiple classes of units, management companies charged investors varying initial charges, usually based on the amount of money being invested. Institutional investors placing larger sums of money were likely to pay less than the individual with a smaller monthly debit order. However, both investors paid the same annual fees. These annual fees cover ongoing expenses involved in the maintenance of the investment, such as portfolio management and administration including the distribution of statements and other correspondence. The maintenance of an institutional investor account is much simpler and less costly than the maintenance of many individual investor accounts, and this is why multiple classes of units are accepted practice in many other countries.
The Impact of Deregulation of Collective investment portfolio Fees and Charges
Collective investment portfolio fees and charges were deregulated on 1 June 1998. Prior to deregulation, collective investment portfolios were not legally allowed to charge more than 1% as an annual management fee. After deregulation, the ceiling on annual fees was removed, meaning that portfolios launched after deregulation do not have the same restrictions imposed on them. Fees are thus determined by market forces and the actual costs incurred which can differ from fund to fund. Portfolios with multiple classes that were launched prior to deregulation (before 1 June 1998) can have the following classes:
- Class R - all investments before the launch of classes are kept in Class R (the "regulated" class, where annual fees may not exceed 1%).
- Class A - the retail class of investments for the sale of new or additional units, which may have a higher annual fee than Class R.
- Class B - the institutional class, specifically for new or additional investments by large institutional investors, with stringent entry criteria.
For portfolios launched after deregulation, there will be no Class R, only Class A and Class B as described above. Any increases in annual fees required that the management company give existing investors 3 months notice after which existing and any new investments would all be subject to the higher annual fee.
Publication of prices
Prices of South African collective investment scheme of members of ASISA are published in the press and are available directly from those companies. Membership of ASISA is indicated on their company advertising and marketing literature. Published prices for those portfolios that have multiple classes of units will be the class with the highest annual fees. Published performance calculations are based on the portfolio class with the highest annual fee or the R class. Data for other classes can be obtained directly from the CIS management company.
