22 May 2020

The Cost Transparency Initiative is a new industry standard for institutional investment cost data. It is a partnership initiative between the Pensions and Lifetime Savings Association (PLSA), the Investment Association (IA) and the Local Government Pension Scheme (LGPS) Advisory Board. The CTI website is here.

AREF has a working group which has prepared the following guidance for AREF members using the template, and also has a representative on the CTI Technical Expert Panel.

General Information

  • The aim of the CTI templates is to collect cost data and not report on the whole of the fund’s activity.
  • Most property funds could use the main CTI template to record costs and the following Q&A relate to the main template. Private Equity-style real estate funds may use the private equity template.
  • The “Institutional Cost Template (ICT)” is a machine-readable codification that gives details of what should be in each cell and is definitive. The text in the CTI guidance derived from the ICT.
  • Fields are mandatory, conditional (mandatory in certain circumstances) or optional.
  • There will be a lot of fields that do not need to be completed in for each fund.
  • Property funds will need to report property expenses at the top level. It will be optional to provide a further breakdown. As part of AREF drive for transparency, we would encourage members to provide a breakdown.
  • Any further work on the CTI templates specific to real estate will probably be included in the next phase of the CTI work.

Q&A on property specific issues

1.    Which template should fund managers of property funds use?
In most cases, the Main Account template should be used. For some closed-ended funds, investing in property or property debt, typically limited partnership structures with a fixed, finite life the Private Equity Sub-template may be used.

2.    Should all fields be completed?
Fields are either mandatory, conditional or optional. Guidance is provided in the ICT.

3.    Can just total balances be provided rather than individual detail of each expense type?
In the ongoing charges and property expenses sections the minimum requirement is to provide the top-level totals. Additional disclosure of more granular cost items is optional. Guidance is provided in the ICT.

4.    Should the portfolio asset value for the “portfolio investment activity” be gross or net asset value?
This part of the template sets out the value of the portfolio of investment assets giving rise to the transaction costs covered in the template. Although the costs themselves are quoted as a percentage of NAV, this particular disclosure is of the GAV.

5.    In the “portfolio investment activity” breakdown, should the net asset value (NAV) be included (debtors, creditors and cash) or just the property valuations?

The purpose of the asset class breakdown is to provide relevant context for transaction costs by including the trades that generated the transaction costs. It is not intended to be a reconciliation of the NAV and should use the GAV of only the investment portfolio ie, excluding debtors, creditors and cash.. The breakdown is not intended to be rigid and should reflect existing client reporting practices.

6.    Where lease incentive accounting is applied, is it the adjusted valuation that should be used?
The value of the property according to the headline transaction price should be used as an indicator of the value that generated the relevant transaction costs. Therefore, adjustments for lease incentives (and other matters) should not be included.

7.    In the portfolio section, when disclosing purchases/sales, is it merely the headline prices that should be shown or does it need to account for rent guarantees, etc.?
It is the value of the property according to the transaction price that should be used as that is an indicator of the value that generated the relevant transaction costs.

8.    Should capital expenditure related to purchases (e.g. agents’ fees, legal costs, etc) be presented anywhere?
Costs related to transactions such as agents’ fees, legal fees, etc should be included as transaction costs.

9.    How should transaction fees be expressed?
Transaction costs should be expressed as a percentage of NAV.

10.    In terms of purchases, should capital expenditure not related to the purchases be presented anywhere?
Capital expenditure to increase the value of a property should not be regarded as a cost item.

11.    Should managers include all costs for funds as a single line in “Fees and charges paid through NAV” or should the other categories in “ongoing charges” be used?
Although the guidance provided in the ICT specifies that all costs should be included as a single line in “Fees and charges paid through NAV”, managers may provide additional granularity by splitting out the costs using the Administration/Governance/Distribution categories where they feel that this is more appropriate.

12.    Should VAT be included as part of fees, if it is recoverable?
VAT should be included as part of fees only to the extent it is irrecoverable.

13.    How does the presentation of fees work when the fee is not absorbed by the vehicle i.e. not paid out of the NAV but instead invoiced straight to the investor?
There is a client specific field for fees invoiced direct to clients. There is a line for rebates too.

14.    Should service charges be gross or net?
Service charges should be net ie. irrecoverable service charges.

15.    Should bad debt provisions be included?
Bad debt affects return not running costs and therefore should not be included as an expense.

16.    How should performance fees be disclosed for indirect holdings?
Inclusion of performance fees in underlying funds and is performed by using the underlying funds’ own cost disclosures. The resultant figures should be included within indirect fees and charges in the ongoing charges section.
Guidance is provided in the ICT.

17.    Where can guidance on disclosure of indirect ongoing charges be found

Costs arising in underlying funds are  required for each of the main cost categories and their inclusion is performed by using the underlying funds’ own cost disclosures.
Guidance is provided in the ICT.

18.    In the indirect row, should this include proportionate shares of indirect vehicles costs?
Yes, inclusion of indirect vehicles’ costs for each of the main cost categories and is performed by using the underlying funds’ own cost disclosures. Guidance is provided in the ICT.

19.    Should ground and head rents be excluded as part of the property level costs?
Ground and head rents are not expenses and therefore should not be included.

20.    On what basis should financials be reported ie. annually reportable based on the funds Audited Financial Statements?
CTI guidelines say funds should report for their financial year. In practice, clients will probably expect the completed templates before the accounts have been audited. In this case, firms could put a note in the comment box that this is provisional info. However, there is no requirement in the CTI framework requiring coterminous reporting.

21.    If the auditors request a significant adjustment to the financial accounts should the templates be amended and re-sent to clients?
Yes, the figures on the templates should be adjusted if the auditors request a significant adjustment to the financial accounts and re-sent to clients.

22.    Should transaction costs and management fees be included if they are charged to capital?
Transaction coats and management fees should be reported even if they are charged to capital.

23.    Should negative adjustments (reductions in fees) be reported where ‘true-up’ calculations maybe required which reduces the original value reported
There is no ability to “true up” where something was due in the last period.

24.    The CTI glossary states that “Cost data should be provided as a percentage of total value invested”. Does this mean it should be provided as a percentage of NAV?
Cost figures should be given as a percentage of NAV.

25.    Should cost data be provided as a percentage of the average NAV during the year?
Yes, it should be consistent with AREF guidance and provided as a percentage of the average NAV during the year

26.    There is no field to capture the NAV.
There is no need to report the NAV. The figures reported are expressed as a percentage of the NAV so the client can calculate their share of the costs, in monetary terms, based upon their average holding over the year.

27.    For ongoing charges, fields are not provided to split many regular costs eg. Environmental consultancy, Subscriptions (MSCI / AREF) etc.
Include these in “other expenses”. A decision needs to be taken as to whether costs are fund or property costs. This is something that managers already consider in calculating the Total Expense Ratio (TER).

28.    The ongoing charges figure for each category does not sum up the items below.
The total for each category is an input field. More granular breakdown below is optional and not all the fields need to be completed.
Guidance is provided in the ICT.

29.    Is the client share calculated based on average holdings during the period?
The CTI requirement for funds is to provide a generic report about the fund with no client specific information. The client should use this data to calculate their share of the costs based upon the average value of their holding over the year. A sufficient number of valuation points should be used to calculate the average value of the client’s holding to avoid distorting the monetary amounts calculated therefrom.

 

 

Please send any questions to info@aref.org.uk

 

Author

Jacqui Bungay

Jacqui Bungay

AREF Secretariat, AREF

Jacqui provides policy guidance and secretariat services to the AREF Board and AREF Management Committee as well as the following AREF Committees: Corporate Governance, ESG & Impact Investing, Investor, Public Affairs, Research and Information and Retails Funds. In addition, Jacqui monitors members’ compliance with AREF’s Code of Practice. 

Jacqui joined AREF in 2014 after working for over 25 years in fund compliance, client relationships and administration at Natwest Trustee & Depositary Services.