Square Mile: Comparing retail and institutional fees

The opening words of the FCA’s Asset Management Market Study stress the “asset management industry plays a vital role in the UK’s economy”. On first reading there follows 200 pages of what seems like well-aimed broadsides at the industry raising concerns about excessive fees, disappointing performance, hidden costs, high profit margins, weak price competition, poor cost control, weak fund governance bodies, etc. However, on closer reading, I interpret the review as being a little more measured and very well thought out. The study acknowledges the importance of the asset management industry to the UK.

There are several snippets within the report that I find fascinating. For instance, the FCA notes little effort is being made to compare the “fees charged by the asset manager for managing a retail fund’s portfolio with the fees the asset manager charges comparable institutional client accounts”. This article considers precisely that.

The plethora of share classes in the post-RDR world does complicate analysis. Square Mile has undertaken an exercise to tidy up the data to enable easier like-for-like comparisons when considering whether a fund offers value for money. Obtaining information on institutional fees is somewhat more complex. Many asset managers do have a rack rate for their services, although these are dependent on the size of investment and how bespoke the mandate is. Bfinance, an institutional consultant, has kindly allowed me to quote from its January 2015 study Investment Management Fees: Seeking Value for Money.

Bfinance has collated a typical cost based on a £100m mandate, although it advises that it is possible to negotiate these lower. The table displays the

Column E shows the difference in AMC for retail/platform fund investors and institutional investors. The differential is remarkably consistent across asset classes and regions, at around 25 basis points.

Obviously, it is far simpler for managers to market and receive £100m from a single client rather than a multitude of retail or wholesale investors. Despite this, fund investors actually get a better deal in emerging market equities than institutional investors. This is a surprise.

I have also included data on UK All Companies funds, even though bfinance includes the UK within Europe in its data. Interestingly, only 10.1 per cent of active funds in the IA UK All Companies sector have an OCF under 0.75 per cent per annum, while nearly 75 per cent of assets in the sector are in funds with an OCF between 0.75 per cent and 1 per cent. This “clustering” is mentioned in the FCA review as a potential indication of a lack of competition on fees.

The other point of interest is the difference in cost for running corporate investment grade bond portfolios for institutions and funds, with fees respectively at 0.24 per cent and 0.51 per cent. I have enquired with the main managers active in both these spaces why such a differential exists. There appear to be several reasons for this, including the fact that institutional mandates tend to be very different in nature and are often run on a buy and hold basis.

Incidentally, Column B details the average fund OCF based on the clean share class commonly available on platforms with the cost data from Square Mile. Since the institutional fee reflects only the asset management fee, it seems reasonable to use fund AMC rather than OCF as a basis for comparison. Unfortunately, Square Mile does not have cost data for AMC and this must be derived in column D from the median “other expenses” taken from the entire fund universe. While this approach results in an approximation, I think the median number will end up being materially accurate for our purposes.

Jason Broomer is head of investment at Square Mile