Hargreaves Lansdown questions focus on active fees

Hargreaves Lansdown questions focus on active fees

Industry figures have said focusing on the price of active funds is not the best way to measure their competitiveness, following the regulator’s damning report of the fund management industry.

In its asset management market study, published on 18 November, the Financial Conduct Authority was critical of the active fund sector for having “limited” price competition, meaning investors often pay high charges for poor performance. 

The paper stated: “While the price of passive funds has fallen, active prices have remained stable.”

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But Mark Dampier, head of research at FTSE 100 firm Hargreaves Lansdown, said it was a “mistake” to assume everyone is thinking about price all the time, pointing out performance is often far more important to investors.

“Regulators and market commentators are besotted by price, but actually most customers are not.”

While he admitted investors should understand the price and claimed an all-in-one fee would make it less confusing, he questioned whether that in itself is the answer, adding: “It’s much more complicated than the question of cost.”

“But the reason passive prices come down is because passives are a commoditised product,” he said, pointing out the performance of active funds within the same sector varies significantly to passives, which essentially all do the same thing.

“Passives are computerised, so all you want is the cheapest one.”

Mr Dampier also argued Hargreaves Lansdown is one of the few groups trying to pull prices down on active funds by trying to strike a deal with the providers.

“I don't think intermediaries fight enough to bring active management costs down,” he said, adding transparency has “ironically” hindered that because providers want to be seen to give everyone the same deal.

He disputed whether the FCA was encouraging investors into passive strategies, saying it is up to the investor to decide where the value for money is.

“I think it will have an effect on the active managers to get their act together and sort their pricing out once and for all, but I don’t think that would encourage investors to necessarily buy more active funds just because they are cheaper.

“I think a lot of these things are happening anyway and this report will make it happen quicker.”

Jason Hollands, managing director of Tilney Bestinvest, echoed Mr Dampier’s points, saying index funds should compete aggressively on price, because the cost is the “prime differentiator” between two trackers seeking to replicate the same index.

“I don’t believe costs are the best measure of how competitive the industry is when it comes to actively managed funds,” he said.

“The right measure here is performance net of fees and in that respect we know that the outcomes are very wide.”

Ryan Hughes, head of fund selection at AJ Bell Investments, said: “With high charges having such a large detrimental impact on long term returns, the FCA is making it clear that passives should be given far more attention that they currently get.”