Understanding Double Fees on South African ZAR Feeder Funds
Quick summary
ZAR feeder funds may include double fees through underlying offshore funds, increasing costs for South African investors. Knowing these fees helps you invest smarter.
What happened
Many South African investors use ZAR feeder funds as a way to invest offshore without the hassle of currency exchange and complex compliance. These feeder funds invest directly into a larger international fund, often based outside South Africa. While this setup simplifies access to foreign markets, it can come with a hidden cost: investors might end up paying fees twice — once in the feeder fund, and again in the underlying international fund.
The Total Expense Ratio (TER) is intended to show the full cost of owning a fund, including ongoing management fees and other expenses. However, when it comes to ZAR feeder funds, the TER can sometimes be misleading because it may not fully capture the combined fees from both the feeder and the underlying fund.
For example, a local South African ZAR feeder fund may charge a TER of about 1% to 1.5%, but the offshore fund it feeds into could charge an additional 0.8% or more. Unless disclosed clearly, investors might believe they are paying the TER of just the feeder fund, when in reality their total costs are higher.
Why it matters
Fees matter in investing because they reduce your overall return. Even seemingly small differences in expense ratios can add up over time through compounding, potentially costing investors thousands or even tens of thousands of rand in lost gains.
In the South African context, where inflation and living costs are rising, every rand counts. If you unknowingly pay double fees on your investment, the money lost could have been used better — for example, to fund your child's education, invest in your small business, or grow your retirement savings.
Moreover, since many South Africans have limited access to financial advice or might trust that their fund managers have hidden costs figured out, this could lead to a systemic underestimation of investment costs.
What this means for South Africans
South African investors need to be proactive about understanding the fee structure of ZAR feeder funds. When choosing a feeder fund, it’s important to ask for the comprehensive total expense figure, which should include fees charged at every level.
Retirement fund contributors and those investing in tax-free savings accounts, retirement annuities, or unit trusts through feeder funds should pay extra attention to TER disclosures and compare similar funds to ensure value for money.
Financial advisors and fund managers in South Africa are also encouraged to be more transparent about these costs and educate investors, who often do not have the time or knowledge to dig deep into international fund fee structures.
Impact on consumers, jobs and small businesses
Higher fees reduce the amount of money consumers have to spend or reinvest, which could hamper South African economic growth. For small business owners who invest savings or pension funds in feeder funds, paying double fees means less capital available to grow or navigate tough economic times.
At the macro level, if many investors suffer from high fees, it could reduce domestic investment levels or shift preference to cheaper local asset classes, limiting diversification. This might also affect job creation, as fund managers may face pressure to lower fees or struggle to attract investment.
On the positive side, if awareness increases about fee structures, competition among fund managers could increase, leading to better products and potentially more affordable investment options for South Africans.
Risks and limitations
While double fees can be a genuine concern, it’s important to note that not all feeder funds impose excessive charges. Some funds bundle fees more transparently or manage to negotiate lower fees with underlying international funds.
Additionally, offshore investments carry other risks such as currency fluctuations, regulatory changes in the foreign country, and geopolitical risks that could affect returns.
Therefore, investors should not reject ZAR feeder funds outright but approach them with proper due diligence. Comparing the net returns after fees and understanding what you pay for — such as access to global markets or expertise — is key.
Lastly, South Africa’s evolving regulatory environment aims to improve investor protection and transparency, which may reduce such fee issues over time, but awareness remains critical.
OnABudget takeaway
Always check the combined fees of your investments, especially when using ZAR feeder funds, to avoid paying double and losing out on returns.
Frequently asked questions
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