Fund managers are being urged to give a clearer breakdown of the actual costs they incur and how they spend their time, amid increasing pressure to prove value for money.
There are a whole host of costs involved in running a fund, from research and trading fees, to set-up costs and the wages of support staff, not to mention office space, marketing, business development and, of course, what you pay the fund managers themselves. But is there upward pressure on these elements to justify investor fees?
The cost of diving deep
Royal London Asset Management head of sustainable investment Michael Fox says that while the job description of a fund manager has changed little in 20 years, the amount of information they are bombarded with on a daily basis has soared.
This means the time and cost of wading through in-depth research is now significant, particularly for those investing for the long term.
Fox says: “The average person probably thinks fund managers spend their day watching what’s happening on Wall Street, looking at screens and screaming down the telephone – this couldn’t be further from the truth.
“In reality it is a cerebral, research-based occupation. We focus on reading and understanding the short-, medium- and long-term drivers of stock markets and companies, and more broadly that’s where we find our differentiating investment ideas.
“It’s not an intelligence quotient game, it’s a temperament game. You have to be able to keep calm and exhibit a certain temperament with the day-to-day market movements.”
Kames head of wholesale business Steve Kenny adds that the need to target the right product to the right markets – now enshrined in the Mifid II regulations – has become harder and put upward pressure on fees.
Kenny says: “The costs of doing business have increased significantly over the past five years. It is becoming more expensive to deliver a fund and oversee that it goes to the right audience and the right channels.”
He also notes an increased regulatory burden more generally and the growing requirement to disclose information to clients in a digestible format. While this has changed how fund managers spend money on getting their message out, it may not have decreased the cost of doing so.
Kenny says: “Advertising has evolved from paper to online, so the way we spend our marketing budget is different to a few years ago.”
The time and cost of wading through in-depth research is now significant
Since 3 January, Mifid II requires investment managers to disclose extra transaction costs charged to their funds, separately from the ongoing charges figure.
The directive also requires financial advisers to report all the costs back to their clients.
As a result of the new rules, clients may not be paying any additional charges, but they can now see separately how much the transaction costs have always added to the total.
In response, the majority of fund managers have now absorbed the costs of the new regulation, which has hit their bottom line. Kenny says this is because research and transaction costs could have accounted for a significant portion of the costs incurred in running the fund.
He adds the introduction of Mifid II has led to an increase in costs across the board.
He says: “Mifid has brought with it the cost of research, which is an explicit direct hit, but there is also the ongoing increased regulatory burden as well. There is the requirement that we oversee our key distributors and that requires people to do that and systems to record that, so there is a whole raft of governance. This type of work can’t be done by administrators, so there’s been rapid growth in the accounting, compliance and legal departments.”
The manager’s take
The FCA has been accused of failing to address fund manager pay in its asset management study. Despite accounting for the largest proportion of the costs of running a fund according to many analysts, critics argue more detailed disclosures about fund manager pay are necessary.
Kenny says the cost burden of managers has now been spread out over a longer time period by firms, rather than in peaks and troughs that could surprise investors.
He says: “The days of getting huge cheques each year have been modified with an allocation for pay spread over three and five years. This means it’s difficult, if you are a successful fund manager, to move from business to business as you would be walking out on a significant portion of your paying rations.”