Management Fee Structure

Discussion in 'Managed Funds & Index Funds' started by hiflo, 18th Oct, 2007.

1. hifloWell-Known Member

Joined:
3rd Jun, 2006
Posts:
72
Location:
Sydney, NSW
Hi

I am wondering if someone out there can help me here regarding calculation of management fees.

I understand that each fund has management fee ranging between 1.5%-4%, which is the bit I understand.

But how is it actually taken out of the fund?

I am looking at Colonial First State Imputation Fund.

The statement says:

Opening balance 583.1649 units value \$2342.40
distribution 5.9302 units value \$ 24.84
total 589.0951 units value \$2462.59

Total fees deducted \$10.49 indirectly

I called Colonial First State and they told me that the management fees were calculated daily on the unit balance but could not tell me how the actual amount was taken out.

Is the actual management fee hidden in the difference in the buy and sell unit price or is there some other mechanism that they deduct fees?

Also if the fees have been deducted, can I put this on to my tax return form?

2. Simon HampelCo-founderStaff Member

Joined:
9th Jun, 2005
Posts:
4,776
Location:
Sydney, Australia
This is a commonly asked question (I should do a FAQ section I think !!).

No it doesn't come from the buy-sell spread, that is different (and is used to cover transaction costs associated with investors adding and withdrawing investments)

The management fees are generally calculated daily and deducted from the capital of the fund.

Remember that the unit price is simply the total asset value of the fund divided by the number of units on offer. This means that if you take (for example) 1/365 * 1.5% (ie one day's worth of fees for the year) from the assets of the fund, the unit price (and hence the value of your holdings) will drop correspondingly.

In reality this means that if the value of the assets didn't change at all from yesterday to today, then after the management fees are calculated, today's asset value would drop by about 0.0041% (assuming a management fee of 1.5%), with a corresponding drop in unit price and the value of your investment.

Now this isn't a cost you directly pay - when you receive distributions from the fund or realise a capital gain or loss from selling units, those fees had already been deducted, and you are receiving your money AFTER fees, and as such are only declaring the NET profit (or loss).

This means that you do not need to (and can't) claim a deduction for these fees.

If the fund manager didn't deduct the fees from the unit price, your distributions would be larger and then you would have to pay the fees and work out the net profit to declare on your tax return for yourself. The fund managers actually do all this for you, so it's all effectively hidden from the process.

3. hifloWell-Known Member

Joined:
3rd Jun, 2006
Posts:
72
Location:
Sydney, NSW
Thank you very much Sim' for clearing this up for me.