Many would argue the fund management industry is already a crowded space. Since the financial crisis, however, several new entrants have appeared, aiming to differentiate on cost.
Fundsmith, launched by Terry Smith, the chief executive of Tullett Prebon, will launch a long-term concentrated global equity strategy with an annual fee of 1% for non-advised investors this month.
This is part of the same trend that has seen the arrival of a British division of Vanguard and the launches of Evercore Pan Asset Capital Management, chaired by John Redwood (a Conservative MP), Spencer-Churchill Miller Private, led by Alan Miller (a former chief investment officer at New Star) and his wife Gina, and TCF Fund Managers, run by Gary Mairs and David Norman, the former chief executive of Credit Suisse Asset Management in Britain and Ireland.
All have a similar premise: that fund management charges have been too high, most active managers underperform and, in some cases, focusing on asset allocation can deliver significant value over the longer term. Their message has largely found resonance because of changes at a regulatory level through the retail distribution review (RDR). As advisers move from commission to a fee-based model they can take a broader look at low-cost products, including passives.
Tim Hale, the chief executive officer of Albion Strategic Consulting, says: “As soon as advisers become fee-based they are freed up to look at the whole of the market and the best solution for the client. They realise that a passive multi-asset portfolio demands a relatively low governance budget, in contrast with trying to pick funds, where programme management becomes very complex. It is easier to choose a passive solution and it is more robust and effective.” (article continues below)
Hale says that in America, where the advice market went through a similar process four to five years ago, there has been a huge take-up of passive strategies. Similar groups that have launched in Britain have found traction among advisers who have already moved to an RDR-ready business model. For example, Dimensional, an American group offering low-cost portfolios, has consistently been one of the top sellers on the Nucleus platform.
There is evidence that advisers are increasingly considering these types of strategy. Duncan Carter, the managing director at Clearwater Financial Planning, says: “We have a foot in each camp. We are still picking funds for some clients but we recognise that 70% of total return comes from the market and we want to obtain that beta as cheaply as possible.” Carter is looking into solutions such as that of Evercore as a possible replacement for discretionary fund management services, which he has found to be expensive and often “closet benchmarkers”.
“We recognise that 70% of total return comes from the market and we want to obtain that beta as cheaply as possible”
Is the argument for this type of approach convincing? Hale says it is “simple maths” that lower costs give a higher return. He says there are ways to outperform the market and some managers succeed in doing so, but it takes a long time to prove persistent skill rather than luck, and predicting those managers in advance is next to impossible.
The fees argument is the most hotly debated. Marcus Brookes (pictured), the head of multi-manager at Cazenove Capital Management, points out that most active funds only cost 1.5% because they incorporate a trail fee to the adviser. The real cost is nearer 75 basis points (bps) and academic articles that “prove” the persistent underperformance of active funds tend to ignore this fact. Equally, if advisers cannot be remunerated by the product provider, as proposed post-RDR, the difference in fees is likely to narrow.
Ben Yearsley, an investment manager at Hargreaves Lansdown, says the Fundsmith offering in particular looks slightly expensive. “If they are simply picking 20-25 global stocks and just holding them for the long term, 1% is too much,” he says. However, as Tim Cockerill, the head of research at Rowan & Co Capital Management, says: “Cost does not automatically equate to the best performance.”
Both Cockerill and Brookes use ETFs selectively and are supporters of the potential added value from asset allocation, but both prefer the flexibility to try to generate alpha through investment in active managers. Cockerill says: “It is about having more opportunities to outperform. Passive asset allocation takes away that opportunity.”
Andrew Bell, the chief executive of Witan investment trust, is moving the other way. He has replaced the passive managers on the trust with active managers, arguing that the growth of passive strategies is creating greater opportunities for active managers to outperform.
The premise of the new offerings is sound and supported by research. It is difficult to argue against active asset allocation and lower cost. However, the cost argument may not be clear-cut and active management still has its supporters. There is no revolution just yet.