South Africans can now buy US unit trusts that have no management fees.
It’s not a scam, said Ingram.
Some of the world’s largest fund managers now offer zero-fee investments.
Ingram does, however, have concerns.
Fidelity, to name one example, allows investments in its fee-free funds only if you have a Fidelity account.
The providers of these investments still expect to make money out of you; they’re not charities!
One way these product providers recoup their costs is by lending some of the shares in your fund to hedge funds and charging them a fee.
It is called “securities lending”.
However, what happens when the hedge fund goes bang?
Some of these funds might also charge a hidden fee via a bid/offer spread which means you are effectively paying an initial and exit fee without realising it.
If the product is a loss-leader for the business, wondered Ingram, then how effective will the outcome be?
Will the provider allocate good, experienced staff to your fund?
How much attention will it receive once they have received their marketing bang from this exercise?
Some of these free funds are only free for a while (e.g. for the first six months; after that they start charging more normal fees, relying on your inertia to not move your money).
The bottom line
Ingram hates paying management fees.
Nevertheless, he advises steering clear of these fee-free investments.
Lending out shares is risky.
Also, he wouldn’t touch a fee-free fund without a long history of showing a “low tracking error”.
In other words, the fund’s performance must be very close to the value of the index it's tracking.
Ingram is concerned that these providers don’t pay enough attention to this, which could lead to worsening investment outcomes.
For more detail listen to the interview in the audio below.
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