Look before you leap – in all things!

The man on the boundary

I had a very relaxed conversation with a fund manager on the boundary yesterday. The chap I was talking to was a fund manager , conversation turned to the fixed costs of the fund – custody, legal fees, registration fees and the like; the fund’s young and some of the costs may be essential but he reckoned that they amounted to 1.3% of the net asset value under management (the value of the assets less any liabilities).

Of course those fees aren’t part of the Annual management Charge but they mean that the fund will have to grow 1.3% pa before it can show any improvement in the underlying price of the units.

Then of course there is the cost of trading. We know on the “round trip” that buying a share excites costs of 0.9% so if the fellow was trading 50% of his fund , he’d be triggering another 0.45% of costs in day to day activities. Which brings fund costs closer to 2% pa.

And for all the trouble, he’ll need to be paid another 1%pa (which is the AMC) , which is why before anybody wraps his fund or adds platform fees that his fund is needing to make the best part of 3% to stand still.

We are in a low growth market, interest rates are on the floor,  expectations from bonds and gilts are next to nothing, it takes an heroic manager to predict a gross return on assets of more than 5% pa right now. Which means that directly investing in this chap’s fund, your expectation for a net return is reduced by around 60% because of the costs of running the fund.

Put another way, the point of this fund is to reward the fund manager more than the investor.

This is anecdotal stuff, no more than a pleasant chat on the boundary , a good humoured conversation between two people who hardly knew each other but knew we were in the same game and could therefore talk freely of the folly of setting a charge cap at 0.75%.


Daniel Godfrey

I heard on Friday, that Daniel Godfrey has been appointed to work with the FCA to help with the Market Review of asset management and investment consultancy.

Daniel was famously kicked out of the Investment Association, where he was CEO, for suggesting that conversations like the one we had on the boundary, were better had with the Regulator and yes – the investor. That it was time we came clean on the true costs of fund management so that investors could make an informed choice on a “value for money” basis.

The idea that we had a transparent view on what our funds really have to achieve, simply to match market beta (the underlying performance of the assets), was too much for those paying Daniel’s salary. He had to go.

I met with Daniel when he was trying to do this brave work, I thought he was kidding me and said so on this blog. I didn’t believe that anyone was genuinely trying to change things from within. Not taking Daniel at his word and dissing him on this blog is one of the things I regret most. I have apologised to Daniel and he’s graciously suggested we move on. But I’ll do it again publicly. Sorry!


The prevailing Zeitgeist

The word I use to explain the mood that enables Daniel to be brought into the FCA and for the Transparency Task Force to get on the front page of the FT is “Zeigeist”. The mood of the nation, from David Cameron down, is for us to know what we are paying before we pay it and know the risks of not paying these fees in terms of value lost.

It’s a bit like the Brexit debate. Now we know the cost of being “in”, we can think about the cost of being “out”, if we are thinking properly about Brexit we must imagine the world as it would be outside the EC. If we are to imagine a world without funds, we must imagine what it would be like to organise things for ourselves.

For most of us, the answer is a compromise, we want to be in Europe which is run on a saner basis than today or out of Europe but in some collective structure that makes more sense than the EC deal we have today.

I am not arguing that the bloke on the boundary was wrong, his fees may be worth it. Nor am I arguing that investing in the index less a small AMC is right, it may not be worth it. But, just as I want to get my head around a before and after analysis of Brexit, based on proper information, so I want to know the value and the money story of the funds I invest in – based on hard facts.


At the moment , I don’t think I get those facts – and that’s what’s a bothering me.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Look before you leap – in all things!

  1. George Kirrin says:

    That’s what happens when we follow the prices only, not the investment returns including the cash flows.

    The trading cost example is an extreme one and I would suggest investment managers investing in securities should tend to hold a longer term view, trading infrequently and in a few cases not at all.

    Taking interest payments, dividends, rents etc. is also a cheaper source of investment returns than selling/trading to realise capital.

  2. John says:

    Some excellent points in the article and the reply from George Kirrin. Most good IFAs will consider all these facts when putting together a portfolio to meet a clients needs and risk profile. We are generally aiming for the best value for money overall charge we can for the client. We will use some higher cost funds, but only if we are comfortable with the fund managers consistant performance that merits it inclusion. Our investment process enables us to focus on the consistency of funds and than fine tune. There are hundreds of funds we use that have nowhere near a 1% AMC. However this is of more relevance with defensive funds as the expected returns are of course lower and this makes some funds difficult to justify. That’s our job though and for those who employ a good IFA that’s what they will get. For those hwo try and do this on their own it is very difficult. We spend a lot of money on buying expensive research systems that enable us to do this. Our own fees are not expensive nor are they cheap but we feel we offer very good value for what we do.

  3. We need greater transparency; this would mean the consumer can make well-informed decisions, market participants that add value will become far more visible and those that don’t will lose market share – this is exactly how an efficient market works, and that’s not what we’ve got, yet.

    BRILLIANT news that Daniel Godfrey is helping the FCA: CONGRATULATIONS to the FCA for having the foresight to seek his input and THANK YOU to Daniel Godfrey for wanting to continue to help the entire sector become more customer-centric.

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