A group of the UK’s biggest fund managers has been told to stop benefiting from a regulatory loophole that enables them to pocket investors’ capital, as the focus on fees hots up.
BlackRock, Legal & General Investment Management and Jupiter Asset Management have all told Investment Adviser that they take the capital from some of the unit trusts they offer, in the form of ‘box profits’ based on the difference between unit creation and cancellation prices.
Jupiter last week declared it made £1.4m in box profits in 2012 in its annual results, a figure which also includes profits from other routine dealing activities.
Chief financial officer Philip Johnson said that the practice was designed to ensure investors were treated fairly when investing or redeeming, not to create profits for the company.
But some experts believe box profits are “unethical” and should be subject to regulatory scrutiny.
“If trust is to be restored in the fund management sector, sources of revenue need to be fully transparent and fair to investors,” said Informed Choice managing director Martin Bamford.
“Fund managers should be charging an annual management charge to investors, and that’s it. There should be no margin from stock lending or box profits.
“We have transparent remuneration practices now for retail investment advisers. The FSA should now focus on fund managers and direct to consumer platforms, to ensure these same standards are applied equally across the board.”
Philip Milton, chartered financial planner at Philip J Milton & Company, said the investors, rather than the providers, should benefit from any incidental trading profits.
“If the manager gets the outcome, then the suspicions could be that the ‘box’ is managed with ulterior motives in mind,” he added.
Gary Mairs, partner at TCF Investments, said: “It is one example of the myriad ways in which things may not be done right for the investor.
“It might seem small, but when aggregated across all investors it becomes a significant cause of damage for investors.”
He added there was an argument the practice was “unethical” but it was not clear whether the alternative – for investors to trade solely in single-priced Oeics – was better for investors.
The calls from advisers come amid heavy criticism for fund managers over pricing transparency.
The IMA has launched a voluntary code for its members in a bid to improve cost disclosure, with Scottish Widows Investment Partnership, Henderson, HSBC Global Asset Management, Aviva Investors and Standard Life Investments all having confirmed they will sign.
Andrew Thomas, product director at L&G, said: “[Box profits] are not a charge in my view and are not unethical in my view either. Investors are always paying the appropriate price.” BlackRock declined to comment.
Thinking inside the box
Under notoriously complicated unit trust pricing, fund providers make money from the spread between the funds’ ‘offer’ price, at which investors buy in, and the ‘bid’ price at which the provider buys the fund units back.
This spread is effectively a form of initial charge, which is taken in addition to the unit trust’s annual management fees.
But some fund providers take this a step further, instead quoting ‘creation’ and ‘cancellation’ prices, that they set themselves, as a way to account for natural fluctuations in asset prices that take place during the trading day.
These prices often lead to extra money being taken from the investors, which can be kept by the fund manager as ‘box profits’ under the UK’s current regulatory regime.
