Few industries have as complex – and ultimately as confused – a relationship with the concepts of cost and value for money as investment management.
Without rehashing the active/passive debate at length, a perceived lack of outperformance by “most” actively managed funds has driven greater focus on cost and led to growth in assets at the cheaper passive end of the market.
For me, the recent furore over transaction costs encapsulates the ‘knowing the cost of everything but value of nothing’ syndrome that currently dominates the industry.
Under Mifid II, groups are required to disclose funds’ transaction costs and several have come under fire for so-called ‘hidden charges’, with a swathe of funds named where fees including transaction costs are much higher than the advertised ongoing charges figure (OCF).
I am not looking to downplay the importance of costs and there are clearly questions to be answered where these charges lead to a doubling of the OCF. But transaction costs are neither new nor hidden and the level of attention on what remain fairly small charges on average is disproportionate to their impact on returns.
When it comes to fund management, value is harder to pin down. My contention has always been that while passives have a role to play in a diversified portfolio, cost is now too prominent in fund selection, and value for money – which can be measured by metrics such as returns net of fees, risk-adjusted performance and delivering the outcome expected by investors – is increasingly being ignored.
From my perspective as a fund buyer, value for money will ultimately have a greater influence on the returns I can generate for investors than costs and charges. Therefore, greater transparency is positive but only as far as it ultimately feeds through to better client outcomes.
We all know the cliché “you get what you pay for”. From the trainers on your feet to the car you drive to the food you eat, there is an understanding that if you want a better product, it will likely cost more.
Not everyone is willing or able to pay a premium price but few argue against the underlying economics: weighing cost against value is an integral part of commerce.
Admittedly, when it comes to fund management, value is harder to pin down: while the ‘end product’ – in the shape of performance – is measurable, it is also impossible to predict at outset. When you buy a pair of shoes, you know exactly what you are getting; with a fund purchase, no one can predict with any accuracy what returns you will receive.
My fear is that if investors select purely on price, they will miss out on the fund managers who justify their fees and costs via long-term outperformance. In markets like Australia, where superannuation schemes have made cost the primary factor in fund selection, evidence suggests investment performance has deteriorated – which is in no one’s interest.
If you look at the UK All Companies sector for example, over 10 years to the end of March 2018, the top six funds - Slater Growth, Lindsell Train UK Equity, our own Liontrust Special Situations, Old Mutual UK Mid Cap, and Royal London UK Mid Cap Growth and SLI UK Equity Unconstrained - have all returned more than 250 per cent.
This is against around 95 per cent for the peer group average and 90% from the FTSE All-Share, the latter representing roughly what you would have got from a UK tracker over the last decade.
There are plenty of other funds offering similar levels of ‘value for money’ but the key, of course, is finding them. I would argue that ignoring things such as process, performance, experience and whether funds are delivering investors’ expectations in terms of returns and risk profile severely limits the chances of doing this.
This dictates that the value for money definition must incorporate more than just cost and the FCA has recognised exactly this in the recently published final findings of its asset management study.
In acknowledging its initial draft proposals in this area “could be seen as too focused on costs rather than the full value proposition of funds”, the regulator’s final rules require groups to publish annual reports proving value for money.
This will be assessed via a range of factors such performance – over a time period appropriate to the fund’s investment objective, policy and strategy – costs and economies of scale.
This looks positive but we will have to wait to see whether these annual reports are enough to help active managers prove their worth.
What is not in doubt is that if active fund managers want to secure market share against the rising passive tide, they need to find better ways of communicating the value for money argument.
John Husselbee is head of multi-asset at Liontrust Asset Management
