Competition in actively managed open-ended funds market is still failing to offer investors the best deals of price, according to exclusive research provided to FTAdviser by former hedge fund manager and prominent industry campaigner Alan Miller.
The research across nearly 1,000 active funds points to a very high degree of price clustering, with the majority all being priced exactly the same despite their differences.
Mr Miller heads up online active wealth manager SCM Direct, and also runs the True and Fair Campaign, which advocates for greater transparency in fund pricing.
Regulators have undertaken several initiatives in recent years aimed at increasing the level of transparency in fund pricing, most recently the Financial Conduct Authority's Asset Management Market Study in June 2017.
Following the findings of the study, the FCA aims to strengthen the duty on fund managers to act in the best interests of investors, and drive competitive pressure on asset managers, including with the disclosure of a single, all-in-fee to investors.
Mr Miller's research pointed to some improvement in the level of price competition between fund houses over the past year. But most asset managers still all charge the same fee for their respective funds, a situation Mr Miller said highlights a bad deal for investors.
In March 2017, Mr Miller researched the annual management charge on the clean share classes of 683 active funds, accounting for total assets of £320bn.
That research showed 70 per cent of such funds charged exactly the same annual management fee, of 0.75 per cent.
Mr Miller agreed to carry out the research again in February 2018, exclusively for FTAdviser.
This time he researched 998 funds clean share classes, representing £552bn of assets.
He said the funds analysed were not exactly the same in both examples, so a direct comparison is not possible.
But of the 998 funds, 58 per cent of the funds both by number of funds and percentage of the total assets, have exactly the same annual management charge of 0.75 per cent.
In both pieces of research the share classes examined were in sterling.
Mr Miller said the improvement is the result of greater awareness from investors, as a result of campaigns run by many organisations, including his own.
But he added: “the results suggest very little price competition and what amounts to a fund cartel”.
He said open-ended active management compares unfavorably in this regard to other investments.
“If you look at the market for ETFs and tracker funds, there are a wide range of prices and prices have been falling for years. The same is true to some extent of the fees charged on investment trusts, where there has been a consistent downward move in fees in recent years.”
He added: “I cannot think of many other industries where more than 50 per cent of providers have exactly the same charge. And I think more than 50 per cent having the same charge could be called uncompetitive and a cartel.”
Mr Miller was extremely critical of the role of the Investment Association, the trade body for investment firms that sell unit trusts.
He said the trade body “champions anti-competitive self interest.”
It should be pointed out that Mr Miller’s firm are wealth managers, and so have an interest in fund fees being lower, in order that the total cost of ownership for its clients be lower.
Responding to Mr Miller’s criticism, the Investment Association said: “There are a number of ways in which one can infer how competitive a market is.
"In our response to the FCA Market Study Interim Report we pointed out that the asset management industry is one characterised by low concentration, a wide product set, investor switching and more notably, a clear downward trend in fund prices following the introduction of RDR.
"In the new unbundled share classes, we saw the price of active funds fall by seven basis points in three years. This trend is likely to continue.”
Paul Gibson, an adviser at Granite Financial Planning in Aberdeen said: "As a firm we have avoided using actively managed funds for several years due to their high charges and general underperformance. Whilst Mifid2 will I feel lead to lower charges going forward I have seen no evidence so far. A leading wealth manager has actually increased charges which beggars belief "
David.Thorpe@ft.com
