Money managers under the microscope
How much do UK investors care about costs?
One way of measuring this is to look at the assets invested in index tracking funds (where minimising costs is a core part of the product) and compare this to funds of funds (where the importance of professional fund manager selection entails an additional cost).
With 30.5 billion pounds invested in the former and 56.6 billion pounds in the latter as of November 30 2011, it would seem that retail investors in the UK are almost twice as likely to pay more for active management and fund selection than to minimise costs and seek to mimic the returns of an index. A similar picture is revealed for sales activity in 2011.
Having been researching this subject since 1999, I continue to believe that transparency and awareness of the ‘drag’ of charges on returns are crucial for long-term investors. Of course cost awareness cannot guarantee investors’ happiness and neither will greater transparency inevitably lead to greater competition. But both are powerful selling points for the mutual funds industry.
Other comments on the current debate:
· Fiduciary responsibility. This concept is acknowledged in the UK – to act in the best interests of investors – but it has not been extended to the oversight of fees. This surely needs further consideration.
· New launches. The relatively small proportion of sales of new fund launches in the UK compared to most other European countries is a good sign for investors here – which also has an impact on costs. Past performance may not be a reliable guide to the future, but no performance is even less so.
· Single figure. While a single charge figure that brings to light trading-related costs is welcome as it raises the importance of costs in investors’ minds, the problems of oversimplification should not be underestimated. For example, including income related to securities lending in a charge figure instinctively seems wrong; while the most important part of a performance fee to understand is its structure.
· The U.S. Example. Competition on fees has taken place in the U.S. where the primary measure of cost comparisons remains the expense ratio.
Finally, while the disclosure of costs is required under European regulations (UCITS), it is worth noting that the Financial Services Authority has stated it does not act as a “price regulator,” although the financial regulator has more recently indicated that this might change in some areas.
Having said this, the FSA has left itself wide open to the accusation of failing to protect investors when it comes to performance fees. In 2008 the regulator stated that “consumers unfamiliar with this charging structure may not be able to make appropriate comparisons or understand their impact on net returns in the absence of a significant improvement in standards of disclosure or literature” – but has done nothing to address this.
At the same time, when performance fees were first allowed and the Financial Services Consumer Panel expressed concern about a lack of caps on such fees, the FSA responded by saying that this issue would be covered by its conduct of business rules that prohibited excessive fees, but then removed its rules on excessive charges.
In conclusion, it remains the case that companies will act on fee-related issues when there is a business case to do so. And there have been pockets of activity where some have acted – most notably pre-empting changes to be brought about with the Retail Distribution Review (RDR). If enough investors voted with their feet (or their pockets) surely there would be further impetus for change.
(Editing by Joel Dimmock)