For many years, investment experts have referred to the long-term annualised real return from global equities as being roughly 5 per cent above inflation before fees and taxes in a meaningful timeframe.
However, a recent paper written by three highly eminent London Business School professors (Dimson, Marsh and Staunton) has challenged this view and has suggested that, looking forward, the premium we can anticipate will be closer to 3 per cent a year.
Clearly this is unsustainable and will force all parts of the value chain to assess exactly how they are providing value for money – the squeeze on fees has only just begun.To put this in context, the average UK equity all share unit trust total expense ratio is approximately 1.2 per cent on a ‘clean share class’ basis.
We then need to add on (undisclosed) dealing costs, spreads and tax which bring total cost of ownership to significantly more than 2 per cent a year and higher for less liquid markets. If these funds are part of a portfolio managed by a discretionary fund manager there could be up to another 1 per cent a year in portfolio management fees. Advisers will also charge up to 1 per cent meaning the total cost to the investor could be up to 4 per cent a year.
So the net effect is that the client takes all the risk and then hands across more than 100 per cent of his expected return to pay fees to a series of well meaning professionals.
Clearly this is unsustainable and will force all parts of the value chain to assess exactly how they are providing value for money – the squeeze on fees has only just begun.
Alan Smith is chief executive of Capital Asset Management
