Following an intriguing article in the Financial Times recently, which suggested that passive fund fees could fall to 0 per cent in a bid by fund groups to increase their market share, it’s fair to say that the race is definitively on for active managers.
The article suggested that 95 per cent of net flows to the asset management industry have gone into lowest-cost quintile funds, and groups should therefore squeeze fund prices ever tighter to advance sales - adopting the loss-leader strategy. Investors’ desire for value became evident, too, in a recent article on our blog where we examined the results of a survey from the UK’s top advisers.
The survey asked how much professional investors were willing to pay for the average UK Equity fund. The industry’s cost conscious nature became apparent - with over a fifth stating that they would not pay an ongoing charge figure, or OCF, of more than 0.75 per cent.
And while all of this demonstrates investors’ hunt for better value, the rise in the number of low-cost index trackers, and the suggestion that there will be 0 per cent fees in the future are further mounting pressure onto the active management industry.
Thankfully, (as some groups in the industry may see it), it has been acknowledged that a loss-leader model, where groups would sacrifice profit for sales in one fund with the hope that they sell other funds off the back of this fund's popularity, would create a logistical nightmare for active managers in relation to a number of factors. For example, how do they determine which funds could hold a 0 per cent charge? What limits need to be applied to the amount of assets a fund could accept? And who would pick up the very real and unavoidable cost of running the fund?
Further to the logistical challenge, another issue with this strategy is the fact that fund costs are not always unjustifiable in relation to returns and alpha. In fact, recent research from FE Trustnet found that by ignoring some big name funds with higher fees, investors could lose out on some of the top performing funds in the UK Equity sectors over the past three years. People do not mind paying when they see value and with this in mind, lowering fund fees could actually work to de-value a big-name fund.
So whilst lowering costs to stimulate sales may be a stellar tactic for other consumer goods, a purely fee-based approach to fund selling and selecting wouldn't work as well. However, it’s clear by investors’ disinclination to pay for active funds and the increasing competition from the world of passives, that more innovative strategies in active management are necessary.
We imagine that groups who take a head-on approach to transparency will fare better than those who leave investors muddled at the prospect of what they may end up paying, and the effect this will have on their returns. So rather than lowering costs in a bid to keep up with the passives industry, what active fund groups can do is make sure that fund charges are displayed clearly, consistently and accurately across all communications - so that investors are clear about what they will be paying.
The asset management industry continuously comes come under fire for its historically murky approach to disclosing fund costs, and investors as a result are naturally suspicious of how much managers are charging and why. Perhaps with a nod to younger investors who, speaking for myself and immediate peers, hold a natural mistrust of those who manage our money - being upfront about charges and attributing them to a particular service is likely to put us at ease.
Steps to a more transparent funds world have already been taken - one of the main ones being around charges and the requirement that fund groups publish their OCF figure as opposed to just a fund’s AMC, which is a more comprehensive representation of what investors will pay to when they buy a fund because it includes trading fees and other operational expenses.
Making sure that OCF is displayed accurately on factsheets, websites, in the press and by third parties such as platforms and vendors is a step in the right direction to making sure your costs are understood. But this is no mean feat and knowing who is publishing what about your funds can seem like a daunting task – and it can certainly be a labour-intensive and costly one.
What you don’t want is a different OCF figure being shown on a platform to your own factsheets, or in some cases no OCF figure at all, leaving investors guessing what they will be paying on top of an AMC. If nothing – it undermines the legitimacy of your group as investors are more likely to view differing OCF numbers across the board with a huge level of suspicion.
So, while it’s important to keep costs competitive, an effort to be more transparent could perhaps go a long way to growing your AUM while allowing you to cover the cost of running your fund without making a loss.
To find out more about how FE can help improve your fund data process, get in touch with sales@financialexpress.net.