Mutual fund investing: On surge pricing, institutional clean share classes, and sales incentives
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Mutual fund investing: On surge pricing, institutional clean share classes, and sales incentives

29 Nov
21 Nov

Institutional clean share classes: What investors need to understand about different share classes before investing in mutual funds

This week's headline news in Hong Kong has been around plans by 1,000 taxi drivers to join a potential strike against car hailing giant Uber's threat to the industry.

While there are certainly merits to the convenience and seamless digital experience brought by car hailing service. There is one thing that I loathe about it - surge pricing. And it is the most brutal when I most need that car ride, or when I'm drenched from head to toe from the sudden downpour.

Unfortunately we live in an increasingly efficient world, where we can pay huge premiums for the same experience as the result of the immediate reflection dynamic changes to supply and demand, such as that car ride which might be 3x more expensive under the black rainstorm warning.

It seems rather unfair, but it works in our capitalist world.

Mutual fund (unit trust) investing is similar yet different. We get the same experience but could pay drastically different fees.

Even more annoyingly, this is due to sales incentives rather than the laws of supply and demand.

You could be investing in the same mutual fund as your friend, but paying different fees because you've invested in different share classes. The funds' objectives and underlying investments are identical across all the share classes and managed by the same fund manager, but each share class has a different fee (expense ratio) and perhaps minimum investment requirement.

To make it even more confusing, the bank or broker that you buy the unit trust from may also only be able to offer you certain share classes, depending on the distribution agreement that they have with the fund house, or their internal rules to maximise on sales commissions (trailer fees).

Read more: Unit trust investing in Hong Kong: The pains of trailer fees

Mutual funds/Unit trusts commonly have several share classes, but these can generally be categorised into retail or ”clean” institutional share classes

There is no naming convention for mutual fund/unit trust share classes in Hong Kong, so you will have to read through the Prospectus and Product Factsheet to carefully conduct some detective work to find out which share class you are investing in.

Below is a real life example to the starking more than 60% difference in fees between the retail share class (Class E, total expense ratio at 1.45%) and the institutional clean share class of the PIMCO GIS Income Fund (Class I, total expense ratio at 0.55%), which you can access through Endowus Hong Kong. 

Devil in the details: trailer fees

The institutional clean share class carries the lowest fees (total expense ratio) of the different share classes of the same mutual fund/unit trust. Why is there a significant fee difference?

The answer lies in sales incentives. One of the key differences between institutional and retail share classes is the trailer fee (also called trailing commission), which is embedded in the total expense ratio of a retail share class and is paid on a recurring basis by the fund manager to the distributor/banker/broker that sold you the mutual fund as long as you continue to hold the fund. This includes popular online brokerage platforms who often market themselves as “zero commission” channels.

The retail share class is essentially a way for retail fund distributors to collect extra “hidden” commissions from investors, on top of “non-hidden” charges such as subscription fees, platform fees etc. 

Read more: A guide to mutual fund fees in Hong Kong

Fees matter, a lot

Because of its lower fees, the institutional clean share class inevitably generates the highest returns of the different share classes. Unfortunately, traditionally there is usually a high minimum investment amount required to invest in the institutional clean share class, typically close to HK$50,000,000 or more. The institutional clean share class is usually targeted towards pension funds, hedge funds or large family offices.

Fees matter, a lot: Remember a $100,000 investment in a fund earning 7% per annum , but with a fee of 1.75% versus 0.75% will deprive you of 152% in returns ($152,000) over 30 years.

Accessing institutional share class funds through Endowus

At Endowus, we believe all investors deserve access to Best-In-Class investment products at the lowest achievable cost. This is why we built our Endowus Fund Smart platform and Endowus model portfolios using Best-In-Class institutional clean share class funds, which are now available to retail investors in Hong Kong in ticket sizes of as low as HK$500.

In cases where the institutional share class is not available, Endowus will provide 100% Cashback on trailer fees we receive from fund managers to our clients, achieving the same effect as accessing the clean institutional share classes. 

This also removes any potential conflict of interest, as we are not incentivised to recommend to you a particular fund that pays us the highest trailer fees.

Click here to get started on your investing journey with Endowus Hong Kong today. If still in doubt, feel free to schedule a free consultation with our SFC-licensed client advisors to start curating a personalised investment plan utilising institutional clean share class funds.


Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance or returns. Projected performance or returns is not guaranteed to materialise. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 

Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

General risk warnings relating to collective investment schemes 

Before making an investment decision, you are reminded to refer to the relevant prospectus/ offering document for specific risk considerations and related fees and charges.

Funds are not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested.  

Some of the funds also involve derivatives. Do not invest in them unless you fully understand and are willing to assume the risks associated with them.


Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus HK Limited (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus HK Limited, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

No invitation or solicitation

Nothing contained [in this article] should be construed as a solicitation, an offer to buy or sale, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction in any jurisdiction in which such solicitation, offer to buy or sale would be unlawful under the securities laws in such jurisdiction. No information included [on this website/ in this article] is to be construed as investment advice or as a recommendation or a representation about the suitability or appropriateness of any advisory product or service; or an offer to buy or sell, or the solicitation of an offer to buy or sell, any security, financial product, or instrument; or to participate in any particular trading strategy. Investors should seek independent financial and tax advice before making any investment decision.

Product Risk Rating: Please note that any product risk rating (the “PRR”) provided by us is an internal rating assigned based on our product risk assessment model, and is for your reference only. The PRR is subject to change from time to time. The PRR does not take into account your individual circumstances, objectives or needs and should not be regarded as advice or recommendation to purchase, hold or sell any fund or make any other investment decisions. Accordingly, you should not solely rely on the PRR in making your investment decision in the relevant Fund.

Complex Products

Some of the funds contained in this article are complex products and investors should exercise caution when investing in these products. Though these products have been authorised by the SFC, authorization does not imply official recommendation. SFC authorization is not a recommendation or endorsement of a product nor does it guarantee the commercial merits of a product or its performance.

This advertisement has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

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