Fee 'tinkering' to disappoint fund firms' inflow targets

Fee 'tinkering' to disappoint fund firms' inflow targets

Fund buyers have welcomed the growing number of asset managers cutting fund fees in a bid to encourage inflows but warned firms may end up disappointed if they simply “tinker around the edges”. 

Last week Kames Capital said it will cut annual charges on its £36m UK Equity Income fund by 15 basis points, with ongoing charges falling by a similar amount, six months after having done the same for its £236m UK Equity fund.

The income fund has performed well over one and three years but, in a sign of changing fortunes for asset managers amid a dire year for industry flows, Kames said the move was made to ensure the product remained “competitive”.

It follows several other fee cuts this year by providers, the most significant of which was Franklin Templeton’s decision to almost halve charges on a trio of UK equity funds in July.

While fund buyers typically prioritise performance-related factors over fees, Sophie Muller, head of research at EQ Investors, said client demand was forcing change.

“The first questions clients ask isn’t ‘what’s your performance like’, it’s about cost. I think the world has changed in terms of fees and costs. The passives industry [shows that].”

Other buyers, however, have questioned whether fee cuts now being introduced, typically in the region of 10 to 15 basis points, are significant enough to make a difference.

Ryan Hughes, head of fund selection at AJ Bell, said he did not think such adjustments represented “material change”, while Alan Beaney, investment director at RC Brown, agreed the moves were “tinkering around the edges”.

“If fees are too high it might preclude a purchase but lowering them won’t necessarily increase inflows,” Mr Beaney said.

There are signs that more forceful cuts, such as Franklin Templeton’s, are having an impact. The firm’s UK Equity Income fund has grown from £183m to £274m in size since its ongoing charges – a more comprehensive figure than the annual management charge - were cut from around 0.9 per cent to 0.55 per cent on July 1.

But even these changes appear to offer little encouragement in cases where funds are sub-scale. The Franklin UK Rising Dividends fund has grown from £26m to just £32m since similar cuts were announced, while Neptune’s Global Income fund – which capped ongoing charges at 0.25 per cent at the end of last year – remains under £10m in size.

Despite scepticism over the effectiveness of some fee cuts, buyers have nonetheless welcomed the broader trend.

Mr Hughes said: “I suspect investors will like to see the improvement in Kames UK Equity Income’s performance continue for a little while longer, but importantly [the change] has put the fund on the radar.”

Ms Muller said:  “UK equity income is one of the biggest sectors and funds’ underlying holdings are very similar - they need to be because in the UK market there are very few stocks that generate that level of income. So how do they differentiate from others? Well, lowering costs is one of the best ways.”