May 2017

OPINION: Fund fees - the issue that will not die

Fiona_RintoulFor what feels like the gazillionth time, fund fees came under scrutiny last month. Like sky-high executive pay, tax-dodging and expenses fiddling, opaque and excessive fund fees are an issue that just will not die. Wherever there is a fund expense, it seems, there is also the temptation to overcharge and dissemble. Why does it keep happening? Christopher Traulsen of Morningstar hits the nail squarely on the head in a recent briefing document. “The relationship between fund houses and fund investors is not a well-functioning market: one side, fund houses, holds a decisive information advantage over the other, investors.” The briefing document, entitled ‘Finding Hidden Fund Fees’, goes on to complain about the dual pricing mechanism used by most unit trusts. The difference between the issue and redemption prices is meant to cover the sales charge and the cost of executing the trades needed to issue or redeem units. That would all be fine and dandy, except that the trades often cancel each other out, meaning there are no costs, but fund managers still trouser the fee. This is quite literally money for nothing. Traulsen advocates banning dual pricing, and no doubt he is right to do so. But one can’t help feeling there is something more fundamentally amiss here – a kind of mentality glitch – that a ban won’t fix. Meanwhile, Lane Clark & Peacock’s (LCP) sixth survey of investment management fees, released in April, reveals a cornucopia of what the consultancy terms “fee paradoxes”. The first is that while median fees are down in most cases, total fees are up because of the strength of investment markets. In fact, the cost of investing in a global equity portfolio has gone up by 70% since LCP’s first survey in 2011. That could be OK if the portfolio were being brilliantly managed by investment geniuses, but this is not the case. According to LCP, managers increased their fee levels regardless of whether their returns were above the benchmark they had set themselves. “We learnt that managers who failed to hit this benchmark return were still benefiting from materially increased fee levels because of the general rise in market values,” says Matt Gibson, a partner at LCP, who goes on to ask why investors are rewarding mediocrity. Why indeed. Partly because of the information advantage identified by Traulsen, no doubt, which is exacerbated by confusing costs. COFUSION REIGNS Later in its survey, LCP highlights one area where confusion reigns supreme: transaction costs. Among the 77 responses LCP received from 126 asset management companies, it found a difference of £380,000 between the minimum and maximum transaction costs reported for a £50 million UK equity mandate. This is basically due to lack of consistency. “The differences are down to varying approaches and different items included in the transaction costs,” says Gibson, who also hints at a reluctance to discuss transaction costs.  Morningstar, too, is exercised by transaction costs, which Traulsen says should be “baked into the cost figure given to investors”. There is no reason why this can’t happen as both explicit costs and implicit costs “‘are measurable costs that fund investors bear on an ongoing basis and should be clearly disclosed as part of any cost ratio”. Indeed. And why not talk about a flat fee for fund management services while we’re at it? There is something deeply depressing about the self-interest around fund fees. It’s a bit like being in a restaurant with someone who is undercharged and doesn’t tell the waitress. One hopes for a moral awakening. But too often it doesn’t come. Fiona Rintoul is edtorial director at Funds Europe ©2017 funds europe

Sponsored Profiles

SPONSORED FEATURE: Investing for income

May 17, 2017

Portfolio Manager Thomas Kruse examines the findings from Pioneer Investments’ survey on income investing and outlines ways of achieving a target income.

SPONSORED ARTICLE: A radical solution to KYC concerns

May 17, 2017

The 1MDB affair shows that lax know-your-customer and due-diligence procedures are a major risk, says Paolo Brignardello, head of product management and marketing, Fundsquare. New solutions are...

SPONSORED FEATURE: AIFMD - What does Brexit mean?

Apr 18, 2017

An open discussion between funds industry experts and initiated by SGG Luxembourg took place in London to examine  the implications of Brexit for UK fund managers marketing to the EU.

SPONSORED FEATURE: Luxembourg fund reporting – CRS vs FATCA

Apr 18, 2017

Luxembourg funds need clear procedures for CRS compliance, writes Andrew Knight, Partner at M Partners, a member of the Maitland network of law firms.

Executive Interviews

INTERVIEW: Finding managers that can (and do)

Apr 18, 2017

Fabrice Kremer, a fund selector at Banque de Luxembourg Investments, has berated fundamental managers for failing to beat indices, but he remains committed to active funds. He speaks to Nick...

JERSEY INTERVIEW: ‘A steady sort of place’

Mar 21, 2017

The chief executive of Jersey Finance is keen to portray the island as a stable, trustworthy jurisdiction. He talks to George Mitton.

Roundtables

MARKETING & BRANDING ROUNDTABLE: It’s about aspiration

May 17, 2017

With such an intangible product, it can be hard for asset managers to communicate what they do. Having personality and connecting with customer aspirations may be the key, our branding roundtable hears.

ROUNDTABLE: The issue is perception

Mar 21, 2017

Our panel discuss tax transparency, the elegance of private placement and why Jersey could do more to promote itself. Chaired by Tom Cowsill in Saint Helier.