Hargreaves Lansdown questions focus on active fees

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.”

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.”

I don't think intermediaries fight enough to bring active management costs down.Mark Dampier

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.”

It might be the turning point where paying less might not be best.Peter Lowman

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.”

But he said he didn’t think the regulator was deliberately encouraging more investment into passives, but that it wanted to ensure passives get equal consideration with active funds.

“With so many funds now available and little evidence of customers benefitting from economies of scale, it is right that the FCA takes a much closer look at the industry.”

Peter Lowman, chief investment officer at Investment Quorum, said the FCA’s push for cheaper fees is “valid and healthy”, but added it is the adviser’s job to sort the wheat from the chaff.

“The FCA is right to point this out and we want to see low fees from active managers, but what we don’t want to see is active managers cutting their fees down to the bare bones.”

He said pulling fees too low would offer no incentive for good active managers and could cause the industry to suffer as a result, but added: “It’s a very tight line.”

The investment veteran said active managers have been “under the cosh” for a long time, but he said we are entering a “new paradigm” where interest rates and yields start to rise.

“It might be the turning point where paying less might not be best, and where paying a tad more for the right active managers could deliver a better performance.” 

Mr Lowman said this will mean it will be about owning segments of the market, as opposed to owning the market: “If you have bought the market, your returns are going to go down.”