Less than three weeks after coming into play and Mifid II has already succeeded in forcing the asset management industry to confront the skeletons in its closet.
It all kicked off on Monday when asset management consultancy the Lang Cat shone a light on the previously “hidden fees” of some of the most popular funds from some of the biggest retail brands.
Woodford Investment Management, Henderson, JP Morgan, Old Mutual and Lindsell Train were among the firms that were named and shamed in the report. Even passive superhouse Vanguard found two of its low cost LifeStrategy funds under scrutiny, as they were revealed to be 11 basis points (bps) and 12bps higher than advertised.
The fact that fund managers have been charging investors more than they’re letting on is hardly a revelation, Mike Barrett, the Lang Cat’s consulting director mused yesterday.
“Most advisers have always known there was more to fund costs than the OCF; however, in the absence of formal disclosure this was just speculation, and they had to work with what the fund groups told them.”
But the industry’s charging “grubbiness” is “likely to be a real turn-off” for investors, he speculated.
“It’s worth remembering that as recently as 2016, the Investment Association was calling these additional charges ‘the Loch Ness Monster of investments’. It turns out that Nessie is alive and well, and charging tourists a third more for a photo than they expected.”
Ironically, many came away from this revelatory moment of industry transparency with more questions than answers.
Context, context, context
Aside from the obvious point that the 20 funds included in the study represent a small (yet highly influential) segment of the industry, the added “transaction costs” category seemed inscrutable to many.
Unlike the ongoing charges figure, which is the industry standard for measuring costs, the newly uncovered “transaction costs” are not so straightforward. First, it is somewhat unclear what they include or take into consideration. Research, transaction fees, trading costs, all of the above?
Without looking at a breakdown of what these transaction fees entail, the headline figures succeed in making the industry look bad but don’t tell investors anything useful, argues Ben Yearsley, director of Shore Financial Planning.
“To the layperson, this table looks bad,” he says. “It looks like you’re being ripped off by a naughty fund manager, the usual kind of story. What the table doesn’t show you is the context behind it – portfolio turnover and things like that.”
Neil Woodford’s flagship equity income fund, for one, went through a dramatic restructuring this past year, as the manager moved toward what he considered to be better value opportunities in the UK domestic market.
And sometimes, you want your managers to be opportunistic, “you don’t want them to necessarily be sitting on the same stocks every year,” says Yearsley.
“There may be very good reasons why transaction costs were high over a particular period,” notes Jason Hollands, managing director at Tilney Investment Management.
“What you certainly wouldn’t want is for managers not to make and implement decisions because they were worried about a disclosure figure on transactions. They must do what they believe is right to generate returns for their investors.”
While Hollands says Tilney has a preference for “buy and hold investors” like Terry Smith and Nick Train, that doesn’t mean he thinks managers who take an opportunistic approach are in the wrong.
“Sometimes large amounts of trading might suggest a manager chops and changes their views. But equally, there are many different ways to run a fund. And for some managers, being more opportunistic might be what they’re good at.”
Significant inflows and outflows from a fund can also impact transaction costs. Given that the funds included in the Lang Cat’s line-up were the 20 most popular funds in 2016, it is reasonable to assume that they experienced an above average number of investors coming in and out of the fund.
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