In 1938, the UK unit trust industry was seven years old, and had assets totalling (in today’s value) £3bn. The prevailing fee was fixed at 0.5 per cent, and the 98 funds in existence rendered fees of £15m a year to keep the managers in port and pheasant.
Today the industry controls over £800bn, but in essence is still behaving as it did 75 years ago. Products have hardly changed, although there are a lot more of them – a 25-fold increase in the number of funds available.
Advances in technology that should have increased efficiency and led to better customer outcomes have merely developed to support a ballooning infrastructure of managers, analysts, sales, marketing, PR and so on.
Data is processed and floods the fund manager floors, but does not appear to have enhanced the customer’s outcome versus the position in 1938. In fact the reverse is true. While the potential range of variability of long-term risk premia have not changed in 75 years, the availability of excess returns has fallen.
This is because while skill may be present, active managers’ charges have almost tripled. Data suggests that in the round, active managers generate negative excess return.
That £800bn AUM generates around £10bn in annual fees and yet nothing seems to have changed to the investors’ advantage. The ad valorem fee remains, and is copied by second-line managers and distributors.
How much more does it cost to manage a £5bn fund than a £50m fund? Marginal cost to customers should be expected to fall as assets rise. However, there are no tiered fees at fund level – the £5 retail platform investment carries the same fund manager fee as the £500,000 portfolio.
Weak equity markets over the so-called “lost decade”, the rise of low-cost passive investments and the growing concentration of distribution across a relatively small number of powerful platforms have increased the pressure on the retail fund management industry.
I believe there are four key themes that fund management groups need to focus their attention:
- A potential FCA thematic review on transparency in asset management followed by guidance on good and bad practice. There is a round of arrow visits currently under way, and such a review would complete the regulatory round-robin that began with RDR for advisers, and Suitability/CP13/1 for platforms and other distributors.
- Product development. Providers are expected to ascertain customer needs through research, and develop products accordingly via a robust and auditable process. Those processes will come under the microscope.
- Analysis of asset managers’ “value network”, ie platforms, DFMs, mandate owners, trustees etc, versus the value placed on, and relationship and support for, end-investors.
- A change in regulatory attitudes to pricing. The FSA did not see its role as being to influence prices. The FCA appears to want to influence pricing to the extent that it impacts positively on the end investor.
The asset management industry’s relationship with UK platforms and others is already being tested and margins being squeezed. Meanwhile, there is an opportunity for managers to expand into new markets.
It is very likely therefore that those local relationships will have to be reassessed; some difficult decisions may have to be made in terms of concentration of resources, election of global partnerships and development of new investor solutions.
Graham Bentley is managing director of Graham Bentley Investment Intelligence