Closet tracking; the beginning of the end?

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Janus Henderson’s twitter feed – 1 tweet in 3 years

The FCA’s headline is misleading. The FCA has fined Janus Henderson £1.9m and required it to restitute retail customers not for fund failings, but for failing to treat one group of customers fairly.

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The response of Janus Henderson’s spokesperson is equally misleading.

‘Since the incident Janus Henderson Group has improved its systems and controls.’

This is not about systems and controls, it is about how you price fund management – “who pays what for what”. No one who knows anything about pricing supposes that this pricing anomaly came about because of an absence of systems and controls. No one thinks that someone just forgot to flick a switch for the retail classes of funds while remembering to do so for the institutional classes.

Henderson – as it was then- thought they could get away with dual pricing for the same product when the product was not “as sold”. They knew that they couldn’t risk doing so for the institutional clients – who had investment consultants looking out for them. They knew that pulling a fast one on the investment consultants would leave them off every long-list going forward.

By contrast, the retail investment consultants and their clients seem to have been unaware that anything was going on

In total, 4,713 direct retail investors, 75 intermediary companies with underlying non-retail investors and two institutional investors in the funds were affected by this issue. – Professional adviser

There must be some awkward conversations going on between these professional advisers and their investors as to how they failed to pick up on what was going on. I am sure that retail consultants would not want to be considered easier to dupe than their institutional colleagues.

Not on our watch

The Janus Henderson spokesperson, who clearly had a busy day, told Money Marketing

“The FCA’s notice relates to events in the period 2011 to 2016 prior to the merger between Henderson Global Investors and Janus Capital Group in 2017.

So that’s alright then. This is institutional phoenixing , where the new owners put reputational distance between them and what came before.

But the reputational damage of duping nearly 5000 investors by neither disclosing the change in value or adjusting the money remains

“Dupe” is the word

I would like to think that Robin Powell is right and that this case is the first in a series  of FCA interventions where it can be proved that active managers moved to closet tracking.

Gina Miller has a dossier of evidence which she has happily shared over the years and this is very much a question of value for money and relates to the 38% margins that the UK funds industry has historically enjoyed (source FCA/CMA)/

However, I’m not sure how many fund houses will have been quite so brazen in their behaviour as Henderson. To openly publicise a change in funds and drop the price for the customers who mattered is actually commendable. To keep another set of customers in the dark is despicable.

What we need to see going forward is more attention being paid to the outcomes of investments made into active funds. If their returns (gross of charges) track market returns, then they are tracking. If the charges for tracking assume active management (and here we need to include the transactional costs), then everyone in that share class is is being given a bad deal for what can be bought elsewhere for a fraction of the cost.

It is time that the FCA came down hard, not just on the active managers charging active fees for passive management, but for the professional retail advisers who buy these funds into their client’s portfolios.


Most active managers make poor passive managers

The skillset of a large passive manager includes the capacity to manage pooled passive funds as extremely low cost. Mercer now boast that – if stock lending fees revert to the fund manager, clients can have money managed in certain markets for nothing.

This is partly because Mercer clients are buying billions of pounds at a time, but also because Mercer and other institutional fund brokers are able to negotiate hard on fees.

While there are exceptions (NEST uses UBS for passive management), by and large passive management is about buying into BlackRock, LGIM, Vanguard and State Street.

Nobody would use an active manager for passive management unless they had “favoured nation status” – as NEST have.


How can you get the best deal on the funds you buy

If you are determined to buy into active managers, you can either use a good IFA manager to get you the best deal on their platform or take your chances self-selecting on an execution only SIPP platform such as Hargreaves Lansdown. For practical reasons , you will probably have to go with one platform and hope you get fair value overall. You will be paying for the right to buy large number of funds from a fund supermarket but this is a price most self-investors seem happy enough to pay.

The small time investor can often get the benefits of lower fees by purchasing funds directly. The obvious place to go is a fund house like Vanguard (if you want your money managed outside a pension wrapper). Retail prices for directly purchased Vanguard Funds are still much higher than the zero cost options available to the billion pound purchasers, but they are a fraction of what you are paying for retail active funds.

For long-term value, the workplace pensions run by the leading insurers and master trusts are hard to beat.

By and large, workplace pensions work with the leading passive managers

Scottish Widows and People’s pension use State Street

Legal and General and Smart pensions use LGIM

Standard Life uses Vanguard

Almost everyone uses BlackRock


All of these buyers are buying funds for you billions at a time. They make their money by selling them on to you at a margin – in return for the utility of the platform and wrapper which is known as your “pension”.

What are we learning?

We are as a nation learning that charges matter, size matters and the capacity to transact at low cost matters. This is why passive managers have an immense pricing advantage over active managers and it is why investors should not use active managers to track indexes unless special circumstances apply (NEST/UBS).

I’m surprised that institutional clients stuck with Henderson to manage money in very trackable indices (Japan and North America). Even if, as rumoured, Henderson were doing this for a pittance, their dealing competence does not match that of BlackRock/LGIM etc. That is a matter for them – they can look after themselves

But this case shows just how vulnerable the retail customer is, and how importance proper governance is. If the fund managers are not to be trusted, then invest through a professional adviser, if professional advisers don’t pick up on what is going on, go direct and/or use your workplace pensions.

It is your money, on average you are giving managers like Janus Henderson a 38% margin on their management fees. If you don’t like the way things are going , vote with your feet and pull your money .

We are learning that your best bet is to take nothing for granted and if you don’t feel confident , stick with size.


Are the FCA getting serious?

I think they are seriously worried about value for money and they are looking for better metrics for measuring it. They need to start measuring the outcomes achieved by investors in specific share classes and not to take the fund manager’s word for it.

Where the same fund is offered at a number of different prices, a clear explanation of why that is should be demanded and should be forthcoming, otherwise sanctions should apply.

But outcomes testing goes beyond reviewing share classes, it looks at what has been achieved by a fund for its stated objectives and can only be conducted retrospectively.

When the FCA start pulling in fund managers for not achieving value – not doing what they say on the packet, then I’ll really feel we’re getting somewhere. In football, if you find yourself at the bottom of the table , you feel vulnerable as a manager. Football managers may get ten weeks, fund managers often get ten years.

It’s high time that the Regulator started calling non-performing managers and asking them just what is really going on. When we see that happening, then I will feel we are really getting somewhere!

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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Closet tracking; the beginning of the end?

  1. Richard Stott says:

    As ever Henry an excellent dive into the topic. I find the issue of who benefits from stock lending to be an interesting one. As an adviser I would prefer to know that it is the end client and not the fund company benefitting even if that means paying a management charge for the fund. (Disclaimer, we only use systematic strategies – we dislike the word passive as it doesn’t properly describe the way many such funds are managed). At least if the costs are known and the benefits of stock lensing income revealed things are properly transparent.

  2. Eugen N says:

    Good that the FCA started getting into this issue.

    A lot of fees are charged for nothing.

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