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Charge conundrum for Mom and Fof

Bates Investment Services has decided to place the bulk of its business with Axa Investment Managers as its preferred multi-manager provider in a bid to reduce charges for clients, arguing that funds of funds&#39 charges are unclear.

With the investment industry experiencing spiralling numbers of moves by star fund managers, Bates believes the multi-manager approach could offer better returns than fund-of-funds providers because total charges are often lower.

The IFA says the current investment climate has magnified the importance of stripping out extra costs, especially for clients&#39 core holdings.

Head of research James Dalby says: “Core holdings usually offer the lowest overall returns in a portfolio – at the moment, well under 10 per cent – so keeping charges down is imperative. The problem with funds of funds is that there is a certain amount of double-charging, which gives IFAs another hurdle to overcome when trying to persuade clients to invest.”

Dalby says the multi-manager approach has become cheaper over the past couple of years. However, due to the fixed costs involved when funds invest in other funds, he believes Fofs may have hit a floor which they are unlikely to break through.

But he stresses this is not so much of an issue for non-core holdings, pointing out that some multi-managers, such as Credit Suisse with its Constellation fund, are rolling out more aggressive products designed to generate higher returns.

Nevertheless, the view that fund of funds providers are expensive remains a common one, not least among manager-of-manager providers.

SEI Investments entered the retail market less than a year ago but says its proposition is already superior to most because its buying power dwarfs that of its fund of funds rivals. Director of UK wealth Theresa Smith says: “I see manager of manager as an evolution of fund of funds – the next step. Not only do we have greater control over the manager we have appointed – they have to manage according to our mandate – but our buying power is substantial. That is important when you consider that we are only buying the expertise of the manager in question, unlike fund of funds, where you are buying into their marketing regime and sales process.”

Smith says managers of managers often have far better research capabilities than other multi-managers, highlighting that it is their sole function to monitor the appointed managers to ensure that they are not drifting from their mandate. She points out that 45 of SEI&#39s 76 employees are involved in manager research of one kind or other compared with less than a quarter of that number at some fund-of-funds providers which have greater numbers of employees.

Such arguments, however, are vehemently opposed by fund-of-funds providers. Most believe there is no longer a discernible cost difference between the two types of approach and doubt the validity of an argument based on the size of research departments.

Henderson Global Investors head of UK retail Simon Ellis says: “On costs, it is pretty marginal. No fund of funds providers pay initial fees these days and most enjoy additional discounts that IFAs would be unable to obtain. Fund of funds companies can also switch manager very quickly while managers of managers find it difficult to change with any rapidity. That is why they employ so many people to monitor their managers – because managers do not always stick to their brief.”

Edinburgh Portfolio claims that manager of manager charges are lower than those of their fund of funds&#39 counterparts.

Managing director Paul Talbot says the advent of renewal commission has typically lowered underlying fees to 1 per cent from 1.5 per cent while costs have been further reduced by the introduction of Oeics. He also says, as charges are effectively investment management fees, they should be compared with those charged by discretionary and advisory portfolio managers.

On this basis, Talbot says manager-of-manager charges are neither “high nor onerous”. He also points to a recent statement released by solicitor IFA organisation Sifa, in which it claims that the capital gains efficiency of fund of funds adds 1 per cent a year to capital values.

Despite the ferocity of the rebuttals, however, Ellis believes the argument has strayed from what is most important to investors – return versus risk. He says: “Price is not the issue. It is about risk-adjusted returns. One of the problems with manager of manager in this area is that, unlike fund of funds, the companies themselves have to be good at asset allocation. If the houses get that wrong, then it does not matter how good the manager is, they have to stick to their mandate.”

The fact that Bates has appointed Axa as its preferred provider is undoubtedly significant but does not represent as seismic a shift as other managers of managers perhaps would hope. As keen as Bates has been to publicise the deal, it has not signed an exclusive agreement with Axa, ensuring that it can refer non-core-holding business to fund-of-funds providers.

However, until the cost of launching a manager of manager service becomes less prohibitive – and there becomes available hard evidence that it is cheaper becomes available – then funds of funds providers look set to dominate for years to come.


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