Somerset throws down gauntlet with fixed-fee bid

Somerset Capital Management is set to shake up the increasingly intense fund-management charges debate by proposing a fixed annual fee covering all its costs.

The boutique asset manager, which introduced a controversial dilution levy on its funds earlier this year, is looking at imposing a fixed fee on star manager Edward Lam’s £763m Somerset Emerging Markets Dividend Growth fund.

The fixed fee would allow investors to know exactly what fee rate they will pay for the fund in the next year, as opposed to the current practice of listing the past year’s charges on factsheets and key investor information documents (Kiids).

The move comes as the industry trade body, the IMA, has been campaigning to make fees more transparent. It has been working on a way for members to provide investors with clear figures about how much funds cost.

The total expense ratio (TER) for the Somerset fund has varied between 1.28 per cent and 1.36 per cent since the fund’s launch in March 2010.

Mr Lam has proposed that the fee should be fixed at 1.25 per cent, a level that would be reviewed annually by Somerset and which would include administration and dealing costs.

The manager argued the current communication practice for fees was “opaque” because it only referred to historic costs. He argued a fixed fee would align Somerset’s interests more closely with investors.

“It gives us the right incentive to negotiate with administrators [and other third parties] to get our fees lower so that we, as the fund group, do not have to pay more, whereas now it is the investors who end up paying if admin charges are higher,” said Mr Lam.

Somerset is in the middle of addressing exactly how it would administer the fixed fee, and said it would initially only be imposed on Mr Lam’s fund, because Somerset’s other funds are not yet big enough to implement it.

But industry experts have raised concerns about the implications of a fixed fee and question whether the idea could be rolled out to the wider industry.

Scott Gallacher, director at financial advice firm Rowley Turton, said it was “possibly a good idea as this would fix charges, and arguably focus the fund manager on reducing costs to the client”.

But he said the other side of the argument was that it could “create a conflict of interest for the fund manager looking to reduce costs, which would directly boost the fund manager’s income and profit, at the expense of quality fund support services”.

Iain Evans, head of UK sales at Polar Capital, said groups do sometimes cap the TER on funds for a short period after they are launched, so a long-term cap could be feasible.

But he warned that firms would have to have a very good idea of the fund’s costs, particularly around trading, and it may only work for funds with low or predictable turnover.