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Holly Mackay: Why I’m sick of lectures on ‘value not price’

Holly MacKay Peach 620x430

Over the last week I have been analysing the charges on some of the UK’s top selling funds. This has made me feel unseasonably grumpy. 

Let me set out my stall. I am cheerfully “addicted to the heroin” of active managers (as one passive convert put it to me). I am not a raging pinko (yet) and am happy to pay companies a decent whack for a good outcomes and a good service. Even after this week I will continue to buy good and possibly even expensive managers. But I am sick to death of fund managers standing up at conferences and lecturing us on how it’s “value not price” when they make it impossible to calibrate what this ethereal value might be.

Last week the UK’s five largest platforms shared their top selling funds for October with me. I wanted to look at some specific funds and it was sensible to highlight the aggregate top sellers across Cofunds, Hargreaves, Fidelity, Old Mutual and Standard Life (now with a hefty combined assets under administration of over £200bn. 

Annual management charge 

I started by looking at the AMCs – typically the easiest to understand. These remain principally in the 0.75 per cent range for UK mainstream equity funds although pricing power and discounts are increasingly evident. I have no doubt the bigger platforms will continue this push. It is interesting to see who has “choked” – as one fund manager so charmingly put it to me.

Woodford’s fund – included in the top 10 across all five platforms – costs 0.6 per cent on Hargreaves; 0.65 per cent on Old Mutual and Standard Life and 0.75 per cent on Fidelity and Cofunds. Fellow bestseller Artemis Income however, is a consistent 0.75 per cent across all platforms. So the posh boys ain’t choked yet. When it comes to transparency however, AMCs are comparatively easy to access, easy to understand and customers get the concept of retailer discounts.

Other expenses

This is where I started to get grumpy. Other expenses relates to the boring paperwork bit: third party administration, client registration, custody etc. This pot used to be bigger pre-platforms when fund managers wore the more chunky cost that was client registration, for example. So it’s a bit odd that in the platform era, these costs have not fallen more.

For a plain UK equity fund of a decent size I am told that up to 10 basis points should be the top end of the norm. Indeed, of the bestsellers, Artemis Income clocks in at 4bps and Marlborough Special Situations at 5bps whereas M&G and Jupiter versions cost four and five times Artemis’ “other expenses” respectively. Customers are entitled to ask why and to include these charges in their overall consideration of value for money.

In a positive move, the UK Fund Platform Group met last week and agreed to all report fund charges as a consistent ongoing charges figure, something group chair Ed Dymott reckons should be completed within 12 months. Perfect? Probably not. Much better than today and close enough? Yes. Good outcome for consumers and it is positive to see this decisive move.

Transaction fees

I have spoken to TCF Investments chief executive David Norman and loads of fund managers on this. Although they disagree on the specific likely band of transaction costs for a portfolio with a turnover of 70-80 per cent, the range of costs they agreed this might represent is between another 0.6 per cent and 1.2 per cent for UK equity funds. So double the AMC would not be unusual. Think about emerging market funds in less liquid markets and north of 2 per cent is not at all unreasonable to factor in. I hear all the arguments about how these costs cannot be known in advance but we simply cannot sell people things where there’s a big secret dunno. 

The Investment Mangement Association has released some ideas on how this could be represented and I’m afraid it’s a lot of numbers which would make most people go cross-eyed. This is what happens when you get actuaries and mathematicians designing customer-facing material. It’s a consumer car crash.  These running costs are impossible to accurately quantify before the event. They include bid/offer spreads, stamp duty where relevant, foreign exchange – everything associated with buying and selling stuff.

The IMA has a tough job here. It is extremely hard to represent this and also extremely important to provide transparent access to this detailed breakdown for those who want it. This is not East Germany 1975 – sharing information is good. 

The vast majority of retail investors surely just want to understand the basic make-up of what they are buying. So here’s a thought.  After years in the finance industry I have been brow-beaten into car analogies. Here goes.

Passive funds in mainstream markets – cheap to run with low turnover – are Smart cars. UK Equity funds with modest holdings and low turnover levels are small engine diesels. (I’m sure Woodford and Buxton are still considered Ferraris to the ladies). Small cap UK equity funds are family estates and emerging markets funds are honking great big gas guzzlers. Pick your anticipated band and stick the picture of your car on the literature along with the OCF. With a link to the small print for those who want to forensically analyse this. Job done?

Check out these illustrations for an idea of what I mean.

Holly Mackay smart car.jpg
Holly Mackay gas guzzler.jpg

I picked Trustnet Direct as the direct platform which today does the best job of sharing fund information with clients and First State Asia Pacific Leaders fund, the probable gas guzzler, which is favourite with fund selectors, first quartile, top of the pops in platform bestsellers and has modest Other Expenses of just 4bps. I’ve chosen Vanguard for the passive fund and today’s anticipated Smart car.  

I leave the final word to my designer, who mocked up these pictures for me. “I have absolutely no interest in what you do but even I understand the car thing.” And that, mes amis, would be a big step forward for our customers who currently have not the foggiest what they are paying and therefore can make no informed decisions about what is good value – or not.

Holly Mackay is founder of The Platforum – her website is



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Well said Holly, really does need to be clearer to consumers… Great analogy!

  2. Great article.

    Fund managers should be careful what they wish for – the next step after ‘value not price’ is ‘payment by results’ which itself is a mere step on the road to ‘no win, no fee’….

  3. Ah! An analogy about cars from someone who isn’t a petrol head.

    OK let’s use the analogy. What investors want is a good 0-60 time and good road holding and handling. If it crashes then it is probably their fault for not paying enough attention. Sitting in a Smart car for a long journey is really no fun at all!

    Too many really suppose that the great majority of clients want to pour over the minutiae of fund charges. What they want to see is a profit and to hopefully do better than the indices and certainly not follow it down too far when things go wrong.

    Monitoring the progress is key.

    To use another analogy. If you invest in (say) M&S shares you may want to cast your eye over Mr Boland’s remuneration structure, but you certainly might not examine his expense account and expenditure on his company credit card. What will be of paramount interest is whether M&S is flogging more goods today than they did before at decent margins and that the share price and dividends are rising. If that’s the case who cares if Mr Bolland takes his wages home in a wheel barrow.

    Indeed one of the biggest bond managers – Bill Gross – used to earn more in a year than most ‘ordinary’ millionaires earn in a lifetime. Who cared as long as his results were acceptable?

  4. correlationstreet 8th December 2014 at 2:12 pm

    or performance fees, hmmm.

  5. Holly, what’s amazing is that the managers you talked to agreed that 70-80% turnover could lead to 60-120bps of extra cost. In most developed markets 100% turnover gives 10-15bps of “hidden costs”. In the UK Stamp Duty adds another 50bps. 70-80% turnover would give 45-50bps of hidden cost in the UK and 10-12bps in the US.The sums aren’t hard to do but the debate has been mainly based on out of date figures when commission and spreads were much wider – something high frequency traders squashed years ago. I’m no fan of hidden costs/high turnover but I’d rather the debate was based on facts.

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