The head of Old Mutual Global Investors has claimed that efforts to stamp out average active funds and closet trackers will take longer than expected.
Richard Buxton said the good returns in the fund management industry meant there was “little urgency” to “squeeze out” average performers.
His comments follow the Financial Conduct Authority’s (FCA) bid to eradicate so-called closet trackers which charge high active management fees just to track an index.
Mr Buxton, who manages Old Mutual’s £2.3bn UK Alpha fund, said: “The active managers are fine if they are delivering alpha, but what you can’t be is the squeezed middle, where you are producing near-index and charging active for it.
“That is the middle ground that will hollow out and continue to lose funds under management.”
The OMGI chief executive said this clampdown will take longer than expected, partly because there has been a lack of consolidation in the fund management industry.
He added: “Throughout my 31-year career, people have suggested that there are too many fund managers and too many funds, but there have been remarkably few mergers or acquisitions.
“Deeply average active funds are in trouble.” Richard Buxton “I think there is too much choice, and consumers should have better choice among fewer products.”
He said it would be years before the average funds were pushed out of the market.
However, he was not concerned about the uprise of passive funds, despite Morningstar figures revealing a 7.7 per cent increase in flows into exchange traded funds between 2014 and 2015. The figure compares against active funds which saw flows fall by 2.8 per cent over the same period.
“I think good active funds are not in danger of the rise in passives, but deeply average active funds are in trouble,” he said.
Jonothan McColgan, director of Bath-based Combined Financial Strategies, admitted that closet trackers were a problem for the industry, but said the solution to the problem was not easy to work out.
“The big issue is value for money. But if you’re paying active management fees for a tracker, the question is, is that the fund’s fault or the adviser’s fault for not paying closer attention to what they are investing in? Some advisers need to take responsibility for that.”
Mr McColgan agreed it would take a long time to eradicate the closet trackers, but said the regulator needed to understand why money continued to flow into such funds.
He said: “We need to understand why people are not aware of what these funds do, are not upset by the lack of performance and are happy to remain in order to solve the problem.
“We have got this problem where things are too expensive for what they are trying to do, but equally it’s a hard issue to resolve.”
katherine.denham@ft.com
