Opinion  

Instead of bashing active funds, find the right one

John Kenchington

There has always been a quiet hubbub of criticism of fund managers, probably based on the fact that funds used to generally charge fees of about 1.5 per cent a year and this was seen as high.

Of course, what was often forgotten was the fact that a good 0.75 per cent was going off to other parties in the distribution chain, such as advisers and platforms, until those fees were stripped out for new investors under the RDR at the start of the year.

Fund managers haven’t really helped themselves with all this, with trade body the Investment Management Association being too quiet on the matter for many years. They have also failed to communicate their fees clearly.

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However, if you buy a good fund, you have the chance of doubling the market return in the long term. Doesn’t that obviously justify active management fees of about 0.75 per cent a year?

The challenge is finding the good ones.

Last week, SCM Private published research claiming almost half of retail funds are “misleading the public” because they are actually simply cloning the stockmarket while charging full active management fees.

This “epidemic” is costing UK investors £3bn a year, apparently, and it is all very “scandalous”.

I wonder if anybody at SCM actually stopped to think about what they were claiming here.

The tell-tale disclaimer, included at the bottom after fund managers were named and shamed, was: “SCM Private is not suggesting that these funds are in any way breaking any FCA rules or general UK laws.”

Funds remarkably accused of being “closet trackers” included Adrian Frost and Adrian Gosden’s Artemis Income fund and the outstanding Majedie UK Equity.

Even renowned contrarian investor Alastair Mundy’s first-rate £1bn Investec UK Special Situations fund was somehow reckoned to be a tracker.

Do me a favour, he’s doubled the market return in the past five years.

The flaw is the research is based on ‘active share’ – really a blunt instrument in assessing how active (in other words, different to the underlying stockmarket) a portfolio has been.

You can’t just say that all funds with active share of less than 60 per cent are closet trackers. In March Lazard research warned users of active share to be mindful of fund benchmarks, their investable universe and whether the manager has been favouring larger companies – all of which can generate a false positive.

SCM is clearly motivated by a need to promote itself here – it wants to highlight that it’s different to the rest. And it is. But for me, its obsession with being an upstart is getting old.

John Kenchington is editor of Investment Adviser