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Pressure to perform
Could we be witnessing the end of performance fees? Moves to scrap the charges in some quarters, coupled with the need for fund firms to produce those tricky assessments of value, have raised the question. As ever, the answer isn’t as simple as it first appears.
There are still 170 funds available in the UK that charge performance fees, per Morningstar data. This year both Polar Capital and Columbia Threadneedle have announced they will stop charging the fees on certain strategies. In the latter’s case, it’s their absolute return funds that will no longer carry such costs.
To some observers, absolute return strategies were already the last plausible holdouts in the push for simpler charging structures. Fees on standard equity offerings are already deemed beyond the pale.
But this view’s less common than it first looks. Take Polar as an example: the firm has said a select few equity funds will no longer carry the charges. Importantly, this isn’t a blanket measure - instead it’s arguably being done to drum up interest in certain strategies. Most of its big-name offerings still carry the fees - and the firm’s popularity among fund selectors, as judged by our fund selection database, shows that’s no impediment to success.
The same goes for another fund house that’s much valued by discretionaries: JOHCM. Its equity funds still carry the fees, and yet the asset manager is also among the most popular with wealth managers when it comes to mainstream fund selection.
So while most popular fund in our database to carry a performance fee is a long/short offering - Henderson UK Absolute Return - there’s still no correlation between a fund’s fee structure and its investment style, or indeed its popularity.
The need to interrogate value more closely, the introduction of more independent directors on fund boards, and now the sight of such fees being scrapped might all suggest that investment trusts’ way of doing things is becoming more prevalent in the open-ended world. The crucial difference, however, is the demand picture - and right now many Oeics and unit trusts will, not unreasonably, think all is well.
The results of Winterflood’s annual investment companies survey, released yesterday, emphasise just how difficult many investment trusts are now finding it when it comes to buyer demand.
As part of its study, the broker asked respondents how large a trust must be for investment to be considered. When it posed this question back in 2013, 71 per cent said they would invest in trusts with a market cap of less than £100m. Even last year, the proportion stood at 55 per cent. This year, by contrast, the figure has fallen much further to stand at just 42 per cent.
The growing importance of being able to trade in and out of closed-ended products is surely partly to blame here - even if respondents were split on whether trust liquidity had improved or worsened in recent times.
The £100m barrier isn’t necessarily a dividing line between trusts and funds - just five per cent of the 1,000+ open-ended funds in our own database are under that same level. The important factor is that sub-£100m offerings account for a significant proportion of the investment trust universe. Winterflood thinks more than 70 trusts fall into this category.
Some of this number will be in wind-down, but the rest face difficult questions over their own future viability. Even if a resurgence in wealth manager interest in trusts is already underway, it’s likely to be focused on different types of strategies to this group - many of which will be legacy equity offerings.
Last Tuesday we - like most other journalists and commentators, as it happens - needed to talk about Tesla. As discussed then, for UK fund buyers much of the interest in the carmaker’s meteoric rise boils down to its effect on just two funds. So a bigger discussion point is arguably the (smaller) surge in Apple and Amazon shares seen over the past two months. The former is up 20 per cent, the latter almost 25.
Both companies’ rise is - like Tesla - in part due to their impressive recent earnings figures. Unlike Tesla, both are part of the S&P 500 - and significant ones at that. Apple makes up more than 4.5 per cent of the index, Amazon around 3 per cent.
As a result, each ranks among the top 10 holdings of more than 100 funds in the UK investment universe, according to FE. Their path from here will have a much bigger impact on wealth managers’ portfolios as a result. More importantly, managers’ ability to overweight or underweight these stocks will also come into sharper focus should the companies' index presence continue to grow.