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What seven wealth managers would pay for a top fund

With so much focus on fund fees this year, we asked seven wealth managers how much they think a top performing fund is worth.

Solomon Nevins

Senior investment manager, Architas, London

 
‘The unfortunate reality is that you don’t need to pay more for a good manager. It’s about selecting the right one.

‘It should be that better managers get paid and rewarded more for good performance, but we are a long way from that. Often fees are not determined by quality of manager but by the asset class. Fees charged in the bond and equity space simply cluster at similar levels.

‘Often you don’t need to pay more to access the best managers. The main issue is the number of poorly performing managers that are still charging high fees. If this persists then the ongoing shift to passive management will continue apace.

‘The increasing focus on disclosure of charges may create a bias towards passive strategies to deliver a cheaper overall cost to the end investor. This may not be the best outcome. We are happy to pay a higher fee to active managers that earn those fees.’ 

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Solomon Nevins

Senior investment manager, Architas, London

 
‘The unfortunate reality is that you don’t need to pay more for a good manager. It’s about selecting the right one.

‘It should be that better managers get paid and rewarded more for good performance, but we are a long way from that. Often fees are not determined by quality of manager but by the asset class. Fees charged in the bond and equity space simply cluster at similar levels.

‘Often you don’t need to pay more to access the best managers. The main issue is the number of poorly performing managers that are still charging high fees. If this persists then the ongoing shift to passive management will continue apace.

‘The increasing focus on disclosure of charges may create a bias towards passive strategies to deliver a cheaper overall cost to the end investor. This may not be the best outcome. We are happy to pay a higher fee to active managers that earn those fees.’ 

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Damian Barry

Senior investment manager, 7IM, London


‘Being one of the biggest multi-managers out there, we are in a strong negotiating position when it comes to fund fees, although our conviction in a particular manager may have a bearing on the outcome.

‘Neither charges nor past performance are a starting point. 7IM’s tactical asset allocation calls will inform the sectors and styles we will lean towards. We’ll then drill down a shortlist of groups, and look behind their performance to factor exposures, such as valuation, momentum, earnings growth, and see how managers have held up across the different market cycles.

‘We then interview the manager to ensure our quantitative analysis is backed by comments from the manager. If we have confidence in the manager and they complement our fund positioning, we negotiate on fees.

‘Given the scale of our business most managers will agree to a substantial discount.’

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Naeem Siddique

Investment manager, Redmayne Bentley, Leeds

'As John Ruskin once said: "It’s unwise to pay too much, but it’s worse to pay too little.” His quote leads straight into the active versus passive debate.

The ability to steer away from certain sectors and companies is always beneficial; the commodity price falls or the ‘Marmite’ support services sectors highlight the pitfalls of going passive.

'Fees have to be justified, and performance fees even more so. Where managers are able to demonstrate a track record of sustained outperformance, and with the caveat of hurdle rates and high watermarks, I believe active managers do have a place in the industry.

'The reduction in fees across investment trusts and unit trusts is welcome, however, a race to the bottom does not necessarily translate into greater performance.

'The right price for a fund can often be that which is additive to investors: those which protect investors’ capital in turbulent times will have earned their fee, the nominal value is a matter for continued debate.'

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Ryan Hughes

Head of active portfolios, AJ Bell, London


‘I view this as an issue of value rather than absolute cost. I’m happy paying a high price for a top-performing fund, but I’m unhappy paying a low price for a poorly performing fund.

‘When looking at fund pricing, I expect the market to move to a more differentiated pricing structure where funds charge different fees depending on how much alpha they are looking to deliver. We are already seeing some signs of this with recent launches of some core/quant funds being priced lower than the industry average.

‘In my view, for an actively managed, high alpha strategy managed by a proven alpha generator, I think the current annual management charge of 75bps feels about right, but I’d like to see more groups cut the cost of “core” funds.

‘While the wind of change is coming, right now, there is little incentive for fund groups to slay the golden goose.’ 

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Tony Yousefian

Head of investment trust research, Fund Calibre, London

 

'There is one thing in life that we can all agree on: quality needs to be paid for, such as a top-notch restaurant, a Rolex watch or a Rolls Royce. 

The investment management industry is not any different. The question is how much is the right price for a top-notch manager?

'I personally believe that a top performing manager should be handsomely rewarded, but I also believe that the industry should embrace the idea of "no pain, no gain'.

'I think a charging structure through which a manager is paid a minimum fee for running a fund, but then paid a handsome performance related fee if he does outperform his benchmark, would be a good starting point.  

'While any outperformance should be rewarded, any underperformance should also be carried forward before a performance related fee kicks in. For equity funds, a basic fee of say 25bps combined with a performance-related fee, which would be capped at 75bps, would not be unreasonable.'

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Edward Heath-Thompson

Associate director, fund research, Coutts, London

 

'While the actual figure will differ from one fund to the next, there are a number of things to think about when considering the right price to pay for a fund. Is it consistently delivering returns ahead of its benchmark? How difficult is it to get good returns in its market? Is its strategy unique?

At Coutts, the fee we are willing to pay also depends on how active the manager is. We need to ensure that we are paying for manager skill rather than market exposure. For example, a high conviction manager whose returns are driven from stock selection is more valuable than a manager who has simply benefitted from a size or style tailwind.

'The size of the investment involved also impacts the price we pay. As one of the larger wealth managers, we know we can use our scale to negotiate cheaper fees than many competitors – which ultimately benefits our clients.'

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Neil Whelan

Investment director, RC Brown, Bristol


‘If a fund consistently generates returns in excess of its benchmark, after fees, then we would be relatively relaxed about the quantum of those charges.

‘We recognise that costs arise from the successful management of a fund, such as the associated infrastructure and provision of service to investors. However, should two funds offer a very similar outcome, we would likely elect for the lower cost option.

‘Charges should vary depending on factors such as the complexity of the underlying assets and investment approach.

‘There is a case that an ad valorem fee rate should fall as an increased fund size results in economies of scale. We would also be willing to consider an appropriately structured performance fee approach, so that investors’ and managers’ interests are closely aligned. Indeed, this is an option we offer our own discretionary clients.

‘In conclusion, we would sit firmly on the fence and say “it depends”!’ 

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