SAVE AND SHARE
An Active Manager Responds
– March 30, 2011 11:33
Fund manager Schroders is launching a series of low-cost, actively managed UK equity funds whose headline fees resemble those of index-tracking products. Paul Amery, editor of IndexUniverse.eu, spoke to Robin Stoakley, Schroders’ managing director of UK intermediary, to find out more.
IU.eu: Does the launch of this type of cheap, actively managed fund suggest that index-tracking funds have won the debate over the cost of investment management products?
Stoakley: Absolutely not. The launch of this fund range is in response to the UK’s Retail Distribution Review (RDR), which is going to come into force at the end of next year. One of the key elements of the RDR is that the charges a client pays for his investments have to be unbundled. Currently, a typical investment management fee is 175 basis points a year. Out of that fee, levied by the fund company, part goes to remunerate the client’s financial adviser and part goes to pay for the platform on which the investments are held.
Under the post-RDR model a customer will have to agree all three of these fees upfront, typically with the adviser. As a consequence, we expect to see more and more advisers recommending low-cost products to their clients.
In the intermediated UK investment market, the only low-fee products currently available are index funds and ETFs. By launching our two “core” products – the Schroder UK Core Fund and the Schroder QEP Global Core Fund – we are seeking to provide funds that are actively managed by teams with proven track records, and at fees that compete with passive products.
Our belief is that passive investing is fundamentally flawed, since most trackers allocate capital according to company size, not quality. And passive funds are destined to underperform their benchmarks. We believe we can provide an attractive alternative.
IU.eu: How is the launch of this type of “core” fund consistent with your offering of other, more expensive active funds? For example, you also market a UK Equity fund charging an initial fee of 5.25% and an annual fee of 1.5%. Aren’t you going to cannibalise your existing fund business?
Stoakley: Let’s be clear – most investors buying our funds through intermediaries don’t pay an initial fund charge. And out of the 1.5% annual management fee a reasonable proportion goes to the intermediary as a rebate. So you’re not strictly comparing like with like.
The 40 basis points “clean” fee we’re charging on our core products reflects our belief that, post-RDR, we’re likely to see two types of funds emerging.
The first type of fund will offer market exposure at similar fees – 40 basis points a year, or thereabouts – while more specialist, higher-alpha mandates, income funds, funds that can’t easily be replicated, for example, will charge more. We expect such funds to be offered at clean fees of around 75-80 basis points.
IU.eu: So what will you be doing with that UK equity fund that currently charges 1.5% a year?
Stoakley: In preparation for RDR, we expect to be offering clean fee share classes in pretty much all of our funds. Our UK equity fund, for example, has a performance target of 3.75%-4% a year above the FTSE All-Share index, gross of fees, while the UK core fund has a performance target of 1.4% over the All-Share index, gross of fees. They are radically different funds in terms of investment profile as well: the UK equity fund has an expected tracking error of 7-8% a year, while the UK core fund has an expected tracking error of 2.5%.
IU.eu: Which areas of the market does the core fund concept apply to? Can you expand it to other asset classes – fixed income, for example?
Stoakley: I’d expect us to stick primarily to equities to start with. It’s possible to do the same in fixed income, but funds in that asset class tend to be more competitively priced in any case.
IU.eu: Can investors buy these funds directly from you, or do they have to go via an adviser?
Stoakley: They can buy them directly from us, although the vast majority of the fund business we write tends to come through financial advisers. Less than 1% of are purchases are made direct.
IU.eu: Do you think that will change? With the current emphasis on containing costs, does it make sense for an investor to pay extra for an adviser’s service, and then more for the platform on top?
Stoakley: There may be a marginal increase in people coming to us directly to buy funds, but I’d expect the majority of investors to continue coming to us via an adviser. People do need advice on investments, after all, and many people, particularly if they are time-poor, find it very convenient to have a platform running all their administration.
So while people will continue to use these services post-RDR, the difference is that the charges will be made explicit.
IU.eu: What about the problem of access to lower-cost funds when platforms are involved? Many ETF and index fund providers have faced difficulties getting their trackers made available on several major platforms.
Stoakley: We’re currently in negotiations with all the major platforms. I don’t anticipate our funds will be on all of them, but they’ll be available on several.
IU.eu: Actively managed funds typically operate with much higher levels of turnover than passive funds, and this can also incur significant costs that are ultimately borne by the investor. What do you anticipate turnover levels to be in your core funds?
Stoakley: They should be low. The teams involved have been running such funds for a number of years and turnover has been in the order of 25% a year.
IU.eu: That’s very low by the standards of most active funds.
Stoakley: Yes, the typical holding period for equities is between three and five years, depending on market conditions.
IU.eu: You said earlier that you regard passive investment products as flawed, since they invest by company size rather than quality. What about those index-tracking funds that don’t follow capitalisation-weighted indices and use some other mean of selecting their components?
Stoakley: The passive investment funds market is getting considerably more sophisticated. However, for the average retail investor the choice still typically comes down to the traditional type of index. And some retail index funds charge quite high fees for what they offer. Our view is that an actively managed fund with strong risk controls and managed by a team with a proven track record is an attractive proposition.
Of course, many investors may still prefer a tracker. With a tracker you know exactly what you’re going to get – which is the index return minus the fees, together with the market’s volatility. With our funds you’re getting the opportunity to outperform. That, of course, means that from time to time there will also be periods of underperformance.
IU.eu: So, in summary, the RDR is having a revolutionary effect on the world of retail investment funds.
Stoakley: Yes, RDR is going to have a very significant impact. The unbundling of charges and the end of commission is a major, fundamental change. The ultimate outcome should be a better deal for investors.
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