The Costs of Entering Africa

Africa presents investors with enticing opportunities. The question remains whether this comes at too high a cost. In this article we focus on the listed equity asset class and identify the costs around investing in listed equity in Africa.

The investor will need to be aware of 3 layers of fees namely multi manager (or fund of funds) fees, investment manager fees and stockbroker fees. Fees vary substantially between investment managers as well as between African markets.

Investment manager fees can range from as low as 0.75% for some multi manager funds and in excess of 3% for funds charging large initial and administration fees. In addition, stockbroker fees can range from as low as 0.35% to as high as 2.4%. These figures exclude performance fees for investment managers and indirect costs due to illiquidity for stockbrokers. Thus, potential fees and costs may even be higher. The investment manager selection process should therefore not be taken lightly.

Layers of Fees

The investor will need to be aware of 3 layers of fees namely multi manager (or fund of funds) fees, investment manager fees and stockbroker fees.

  1. Multi Manager Fees
  2. Investment Manager Fees
  3. Stockbroker Fees

Multi managers and investment managers charge management fees, performance fees, administration fees, custodian fees and some charge an initial fee.

  • Management Fee: The fixed annual basic fee payable to the investment manager for portfolio management services.
  • Performance Fee: The investment manager will also be entitled to receive a performance fee for any performance in excess of the hurdle rate. The hurdle rate typically is US Libor plus a percentage.
  • Administration Fee: The administrator will receive fees for its services regarding the daily operation of the portfolio including cash flow management, account activity, record keeping, data management and return calculations.
  • Custodian Fee: The custodian will receive fees for its services regarding physically holding the assets and maintaining the asset register, settlement of transactions, tax compliance, reporting on corporate actions etc.
  • Initial Fees: The once off fee for the opening of new accounts. Initial fees may be waived on discretion of the investment manager.

Stockbrokers charge stockbroker fees (brokerage), levies and taxes.

  • Stockbroker Fees: Brokerage is the fee that the stockbroker will charge for the trading of listed equities.
  • Levies and taxes: These include any stock exchange taxes and levies relating to the trading of listed equities. These will vary from stock market to stock market.

Multi Manager (or Fund of Funds) Fees

Multi managers will typically charge a management fee of 0.75% on average. This fee is in addition to the underlying investment manager fees. Therefore the investor will pay the investment manager fees as well as an additional fee to the multi manager.

Investment Manager Fees

The fees charged by 19 Africa-focused funds open to South African investors were analysed. Fees vary substantially from fund to fund.

Africa Funds Fee ComparisonPeer Group AveragePeer Group Spread
Total (excluding performance fee)2.50%0.79% - 7.92%
Management Fee1.45%0.75% - 2.00%
Performance Fee15.36%0% - 20%
Admin & Custodian Fees0.41%0.04% - 0.92%
Initial Fee0.31%0% - 5%

Management fees range from as low as 0.75% to as high as 2%. However, a fee of 2% is the extreme and the average management fee is 1.45%. Some investment managers do not charge performance fees while others charge as high as 20% performance fees which results in an average for the peer group of 15.36%. Most investment managers charge performance fees of 15%.

Administration and custodian fees range from 0.04% to 0.92% with the average fee around 0.41%. Some investment managers charge an initial fee of as high as 5%, however these fees may be waived on discretion of the investment manager and is normally the case.

Total fees (which include management fees, administration fees, custodian fees and initial fees but exclude performance fees) for Africa focused funds are 2.50% on average. These fees can range from as low as 0.79% to in excess of 3% for funds charging large initial and administration fees.

Stockbrokers Fees

African Stockbroker Fee ComparisonAverage over all African Stock Markets
Total1.50%
Stockbroker Fee1.05%
Levies and taxes0.45%

The table above indicates the average direct costs such as brokerage, levies and taxes over all stock markets in Africa. On average, expected direct costs are in the region of 1.5% although this can vary substantially from stock market to stock market.

It is important to note that indirect costs such as market impact cost due to illiquidity and opportunity cost are not included above and could potentially add to the total cost to access each market.

Summary

Fees vary substantially between investment managers and stockbroker fees also vary substantially between stock markets. It is therefore very possible to lose all the returns generated by the investment manager through fees. The selection of investment managers are very important and can add substantial alpha if done carefully. The investment manager selection process should therefore not be taken lightly.