As multi-managers look to reduce charges ahead of RDR, there is concern investors could pay in the long run if fund performance suffers. Joanne Ellul reports
Multi-managers are trying to reduce their charges ahead of the retail distribution review but there are fears that the need to bring total expense ratios down will undermine the perform-ance of the funds.
The four funds with the highest TERs on Chelsea’s relegation zone are multi-manager funds.
CF GHC multi-manager global equity fund has a TER of 3.3 per cent, the Elite Hurlingham balanced portfolio sits at 2.98 per cent, Aberdeen multi-manager emerging markets has a TER of 2.97 per cent and Ignis multi-manager cautious is 2.58 per cent.
Multi-managers are tackling charges in different ways, some using fund mergers and additional share classes to bring costs down and others moving from active managers to passive vehicles.
Last week, Skandia merged its £29.8m global and £48.2m UK fixed interest blend funds into its £61.3 strategic bond fund to create a £140m multi-manager offering.
Skandia head of multi-manager Ryan Hughes says: “This brings the TER down on the three funds by approximately 45 basis points to 1.52 per cent. The annual management charge has fallen from 1.25 per cent to 0.8 per cent.”
Skandia also merged its £35.8m UK equity blend fund into the £136.8m best ideas fund last week.
Both funds share similar investment objectives and AMCs of 1.5 per cent. The merger will shave a couple of basis points off the UK equity blend fund’s TER, from 2.32 to 2.3 per cent.
Hughes says: “One of the factors behind this merger is making sure our funds are as competitive as they can be and, where possible, we would like to see the cost of our multi-manager products on a par with our single-manager products.
“It is easier to aggress-ively manage our costs because of our scale and the structure of our invest-ments. We can construct our own segregated man-date, which is cheaper than trying to invest in other funds and fund of funds as our peer group does.” Hughes says segregated mandates do not incur many of the fixed costs associated with managing an Oeic, such as accounting fees, legal costs and audit charges.
Thames River co-head of multi-manager Gary Potter says the firm has capped the TER on its lifestyle multi-manager range at 2 per cent.
He says: “I am looking forward to an environment after the RDR when we can have additional share classes with a cleaner fee.
“We will consider adding an additional share class with no front-end charge and an AMC of between 50 and 75 basis points by cutting out distribution costs. We have to keep a lid on the charges.”
Potter says this will be achieved by stripping out the platform distribution charge and offering a direct-to-consumer share class. He says offering a range of share classes will be essential to offer investors more choice following the RDR.
The lifestyle multi-manager range has a TER capped at 2 per cent but the typical TER on Thames River’s traditional range is 2.3 to 2.7 per cent.
Legal & General’s multi-manager range currently has a 1 per cent AMC and a maximum performance fee of 1 per cent. It is adding an additional share class with a 1.5 per cent annual charge but no performance fee.
Head of unit trusts Simon Ellis says: “I have heard my colleagues talk about charging non-trail commission share classes with performance fees after the RDR. Investors will become more discerning about what constitutes high alpha. We created our multi-manager funds with that structure.”
OPM fund management chief investment officer Tony Yousefian says his firm outsources the adminstration on its funds so it can concentrate purely on investment management and keep the charges to a minimum.
The TERs on the OPM funds are approximately 1.6 per cent.
Yousefian says. “We use a lot of alternative products with low TERs. For example, some of our exchange-traded funds charge 50 basis points.”
Yousefian says medium-sized investment firms will struggle the most to reduce their charges.
He says: “Following the RDR, there is going to be a rush to keep charges low on all funds. The larger firms that have the ability to cut through the fat and keep their products lean will do really well, as will the small boutique firms where overheards are nowhere near as big as the larger firms.
“However, the middle-ground businesses are the ones that will have to become large enough, or reshape to become boutiques, so they can reduce their charges.”
Hargreaves Lansdown senior analyst Meera Patel says: “The best thing multi-managers can do is cap TER charges, which is what Thames River has done.”
She says using passives to keep charges low throws up the question of whether managers will be doing a disservice to investors as they are paying them to find the right manager that gives the best returns.
Patel adds that managers with performance fee share classes must offer additional share classes without performance fees.
She says: “Not every inv-estor wants to pay perfor-mance fees, so they should be given the choice.”