ELVIS, HEATWAVES, OLIVES AND FEES…

Wow, what a scorcher! No, I’m not referring to the mini heatwave we are experiencing in the UK, (with apologies to the North of the UK where it’s a little bit cooler), but rather the heat of the political scene and what remains of Mrs May’s team in Government. 

Boris Johnson is now in Number 10 (incidentally, he was once quoted as saying “My chances of being PM are about as good as the chances of finding Elvis on Mars, or my being reincarnated as an olive”) and finalising his Cabinet with the biggest cull of ministers in 60 years.!

Will things change? Of course they will. For the better? Only time will tell… 

There have been many changes over the years in the Fund’s industry. Some good and some, well let’s just say interesting! The news today shows there is more change coming in, according to PWC  there will be 20% fewer asset management firms by 2025 due to pricing pressures (https://citywireselector.com/news/20-of-asset-managers-wont-exist-in-2025-pwc-says/a1252747)  which sends a strong message to the UK Funds industry that we have to manage assets more efficiently and be sensitive to pricing pressure. 

The last 25 years of the Funds industry has seen a significant reduction in fees earnt by Fund Managers whilst, bizarrely, fees have pretty well stayed static even with increasing administration, compliance and legal costs. Since the late 1980s when brokerage turned into commissions and then commissions turned into trail fees swiftly followed by neither being paid by Managers to Advisers, there has been a steady increase in the oversight of Funds. 

This is no bad thing, but boy does it add to the costs. If you have ever tried to negotiate on fees with a lawyer you know how hard it is to reduce certain fees! True, some of the administrators have taken great strides in being more efficient and introducing straight through processing but we still live in an era when facsimiles are still sent to some administrators! So how on earth is that going to save money?

There are constant diatribes in the national papers about the Funds industry being expensive.  More recently there was a debate on the BBC “The Bottom Line” with Evan Davies where misleading views on the pricing of Funds versus Investment Trusts were rolled out. Comparison with an IT at 25bps being bought direct and a Fund being purchased via an Adviser via a platform meant the comparison was pointless and yet investors listening to it would have believed that Fund Managers are screwing them. 

The reality is far from it, as Fund Managers have worked hard in creating value for fund products over the years. There are naturally exceptions to this and we need to look at the whole value chain to see where the real costs are borne to see what adds the value and what price they should pay. At times it feels the analogy should be Fund Managers are like Farmers producing the goods at a rate per head of cattle but the overall price is controlled further down the line to the point your pint of milk is priced 10x the production cost on the farm!!

Fees from Fund Managers need to reflect the work in producing the product clearly. If a manager is producing market returns, then the fund should reflect that with low fees. Producing top quartile performance should be rewarded however, investors’ appetite for this have not produced the expected support. Equally, there are a significant amount of assets held in underperforming funds which, due to inertia by pension managers and other longer-term investment advisers, do not move. These inhouse products tend not to be sold by Advisers, who are naturally judged by their clients for the quality of the returns produced.

We have to look at the fund flows from retail to see that the vast majority for “independent” advised money goes to the better performing funds. A no brainer!

There are many critics of our industry, particularly in the national press and Woodford didn’t help, but let’s take credit where credit is due. Where there is quality in asset management coupled with quality advice at a truly independent level together with excellent business practise and process, then investors/the public will benefit. Fees are not the issue here. The quality of any service provider should be challenged but not ‘willy-nilly’ as we see so often in the national papers who with a carte blanche chastising everyone and everything we do in the Funds business. 

We need to improve yes, but we have come a long way over the last 30 years and with innovative technology and a realistic appraisal of the value chain, we should be able to deliver strong active and passive management at a price that investors expect. However, it isn’t in the hands of the Fund Managers, to drive costs down it’s in the hands of the service providers where the true costs sit. 

So before you ‘have a go’ at a Fund Manager about their fees, look at the other costs and assess who really is adding the value.

Anyhow – I’ve just heard Elvis has been found on Mars…that’s for another story…

Have a cool day…….

Stuart Alexander

Chief Executive

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