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Highly charged debate over funds

Chris Salih assesses why 1.75% is becoming the new 1.5%.

Hikes in annual fund management fees – claimed to be a necessity by some and greed by others – have divided the industry.

A Money Marketing survey found 83 funds from almost 40 groups now have an annual charge of at least 1.75 per cent when 1.5 per cent had been the benchmark.

Fund firms says this is due to the growth of specialist vehicles and the additional research needed to support them. Advisers want to know what defines “specialist” and that providers are not simply boosting their profits.

The boundaries of what defines a specialist product is interesting. If one takes it to mean a fund in the Investment Management Association’s specialist sector, then funds come in all shapes and sizes, ranging from billion-pound property funds to niche technology and regional vehicles.

Resolution Asset Management head of sales and marketing Jonathan Polin says specialist is open to interpretation as so many funds use investment management strategies unique to the fund group.

He says: “An AMC of 1.75 per cent for a high-alpha vehicle that is performing is fine as capacity tends to be limited but to use it for a bog-standard UK product is not right.

“You need to see the effect of the specialist charges, first, through performance and, second, by what makes its mandate unique.”

Polin respects the decision by Old Mutual Asset Managers in capping its UK smaller companies portfolio and raising its AMC from 1.5 to 1.75 per cent.

He says: “What it is effectively saying is that it wants to do the best for its existing investors in the fund by ensuring it does not become so big that it has issues with manoeuvrability. So to cope with that, it has effectively closed its doors to new investors and raised its AMC by 25 basis points to keep performance strong.”

But BestInvest head of communications Justin Modray believes Old Mutual has taken a risk. He says: “If you were to apply an increase of 0.25 per cent to a fund that is basically £500m, what you are effectively doing is adding an extra £1.25m a year profit. Some may need that money for research but others are just using them for bigger profits and bonuses.

“In this case, the UK smaller companies fund is a top performer so clients can accept the inflated AMC in those circumstances. If the fund should underperform over any prolonged period, it could lead to a mass exodus.”

Modray believes the need for additional fees to run specialist funds as an argument that is being overused. He says: “It is an argument if it is a smaller fund that uses a different process but, unless it markedly outperforms or is the likes of a technology or private equity fund, then the argument just does not wash.

“What IFAs need to do is vote with their feet. From a commercial view, it is fine for fund groups to keep doing this so long as IFAs carry on buying them despite their grievances.”

Premier Fund Managers has nine funds that levy an AMC of 1.75 per cent, with the majority of its range carrying the fee for some time.

Chief investment officer Richard Muckart believes this is not unusual. He says: “We charge the market rate for the funds in our range. The headlines show that 1.5 per cent is now history for a lot of fund managers.”

Standard Life’s select property fund recently broke the £1bn barrier after only 15 months. If you apply the additional 0.25 per cent AMC in the 16 months it has been running, the fund has made an extra £3.46m.

Head of mutual investment Jacqueline Kerr says this fund is not only unique but has performed very well in the past 16 months. She says: “We do consider this to be a specialist fund as it invests in direct property globally. The fund has clearly performed in the sector and the fact that it has reached £1bn in just over a year proves advisers have given it the green light.”

With almost 40 fund groups now adopting the higher-charge stance, is it fair to say that 1.75 per cent is the new 1.5 per cent?

Fidelity head of IFA channel Peter Hicks says: “1.5 per cent has been the standard-bearer for so long but you should never say never. Surely, 150 basis points is enough for an equity fund to make a profit and ensure that the investor comes first?

“We do more research than anyone else and only our moneybuilder fund, which invests in underlying vehicles, is charged at 1.75 per cent. We would be hard pushed to justify that fee for a single strategy fund. We looked at that charging structure on FundsNetwork and decided that would be taking too big a slice of the cake and it would not be fair to investors.”


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