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Highly charged arguments

The survey, in conjunction with Financial Express, found that 40 out of 65 highcharging funds failed to beat their benchmark, with 26 recording bottom-quartile performance over three years.

If a £500m fund has an AMC of 1.75 per cent rather than the industry average for active managed funds of 1.5 per cent, it means the management team are scooping an extra £1.25m a year from the fund.

Managers often argue that these higher fees are essential to drive outperformance as specialist funds become more prevalent in the marketplace.

But Chelsea Financial Services managing director Darius McDermott says the additional cost has to be justified and that 1.75 per cent cannot become the norm.

He says: “There has to be an added level of work somewhere, whether it be research, liquidity or in dealing costs. I am against the principle of 1.75 per cent but I can accept it if the fund performs markedly.

“Neil Woodford runs a traditional UK equity income fund range that is almost unrivalled in terms of performance and he only raised his AMC from 1.25 to 1.5 per cent in the past couple of years. How can anyone who runs a traditional fund charge any more than that?”

Notable funds on the list include the £1.4bn Aberdeen Asia Pacific and £608m Fidelity Moneybuilder global fund which are both in the third quartile over three years.

Dalton Strategic Partnership’s Japan, European and Asia opportunities funds have also underperformed despite AMCs of 2.15 per cent.

Dalton partner Richard Jones says: “We expect all of our funds to outperform in the medium to long term but that is not always the case with active vehicles that operate an unconstrained approach but when they go right they tend to fly.

“With regard to the fee, we charge the excess as we limit the amount that goes into the funds as we would rather run them on an unconstrained approach than have six times the amount of assets in the funds.”

Hargreaves Lansdown investment manager Ben Yearsley holds a number of investments with Dalton and says the charges need be justified. He says: “An argument can be put forward for one-year performance as the difference between top and bottom quartile can be minimal but over three years that is unlikely to be the case. This is where the argument is raised of money being paid back as funds have to justify the fee.”

Bestinvest research analyst Tom White says: “There are some 1.75 per cent AMC funds that we recommend and it is something we look at, alongside manager track record, as a big influence in recommendations. I have been in the industry five or six years and it does seem to be creeping up all the time.”

Premier Asset Management has two funds – enterprise and European growth – with AMCs of 1.75 per cent and managing director of sales and marketing Simon Weldon says they do need to offer something extra.

He says: “The days where all funds are offered at the same price have passed. The important things to remember are that charges are irrelevant if performance is strong and that, unlike traditional sectors, the difference between funds in specialist markets in short spaces of time can actually be quite marked. But they need something different.”

Two firms that have raised eyebrows recently by elevating their fees are Old Mutual Asset Managers on its UK smaller companies fund and First State on both its Asia Pacific and greater China growth funds.

Yearsley was particularly critical of First State’s decision at the time, saying that as its funds were fairly niche, investors were unlikely to walk away.

London & Capital head of UK distribution Jamie Farquhar says: “It is down to the IFA and the investor as to whether they feel this additional fee is justified. If providers say this is the price for these products and someone feels that is too much, they can steer clear. If they accept and it underperforms, they can vote with their feet.”

Kohn Cougar managing director Roddy Kohn says: “With the growth of specialist offerings, I would like to hope that this move to 1.75 per cent AMC on funds is not an irreversible trend. It is wholly unjustified and the greatest disincentive to advisers as they understand the effects of costs on a portfolio’s return.”


Structured thoughts

When economic times change, it always fascinates me to see how different areas of the financial services industry respond to meet the changing demands of clients and customers while also being sure to make a decent profit.

OK consumer

A wise 1960s’ Californian (no, that’s not oxymoronic) argued that it is the nature of the communications media that a society uses, rather than the ideas transmitted through those media, that shapes society. Isn’t that a fantastically counter-intuitive thought?

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