Back in 1999, Friday, June 18 to be precise, I cut out a short article from the Financial Times.
There was a quote in it that had particularly appealed to me. Kim Howells, the competition minister, had said there was “absolutely no intention to set benchmarks for prices”, adding that it would be disastrous if such judgements were made by civil servants “or still less politicians”.
In fairness, he happened to be referring to cars or, more precisely, the need for improved transparency of pricing information in the car market.
However, it set me thinking, especially as the term Cat standard had then only recently been given its public airing in the financial services industry.
Product simplicity that prompts consumers to shop around increases competition and puts prices under pressure is laudable. But the case for price caps is less compelling.
The 1 per cent, all-inclusive cost ceiling required for unit trust and Oeic products to meet the Cat standard is a commercial challenge for any organisation but not one that some funds have too much difficulty with.
These tend to be trackers, large funds or funds with little or no advisory/service facilities. In such circumstances, 1 per cent can actually look quite expensive.
To provide total fund services at a cost of 1 per cent or less, you really need mass funds under management. Where better to look than the US?
According to the Investment Company Institute, Autif's equivalent in the US,the mutual fund industry is 14 times the size of the UK's.
At the end of last September, the UK unit trust and investment funds industry had £269bn under management, the equivalent of $390bn, while the US mutual funds industry had totted up total long-term assets of $5.541bn.
There are, of course, more funds. Almost 7,000 as opposed to a little short of 2,000 in the UK. Also, over the years, US mutual funds have been more successful in capturing the imagination of long-term savers and investors, in large part those people who have been building up their retirement funds.
The way US pension legislation is structured has been the great enabler for the mutual funds industry there. In the UK, however, it has been the advent of Peps and their successors, individual savings accounts, that has had the positive effect on the growth of the funds industry. The difference is one of scale and that is the big issue. Scale determines levels of efficiency and the range and quality of services that can be offered because it directly has a major influence on costs.
The ICI has conducted detailed analysis on fund operating costs (this excludes distribution and advisory services) and reveals that the average operating expense ratio is some 112 basis points for funds between $251-500m. That is more than 10 per cent higher than the UK Cat standard.
For funds between $0.5bn-1bn, the average ratio falls to 101 basis points.
For funds over $5bn, the ratio is down to 70 basis points.
In the UK, the average fund size is significantly lower. For the top five players, it is £278m, that is $400m, while for the industry it is £135m, that is $195m. There is only one fund in the UK unit trust and Oeic fund industry valued at over the equivalent of $5bn. Following on behind are 75 funds at over $1bn. In total, there are 203 funds of over $0.5bn.
All these funds have to be distributed if the Cat standard and stakeholder messages are to be conveyed effectively, nor can we forget the need for long-term service. As US fund managers have said to us, they grew big because they could distribute. The main reason for the costs coming down while maintaining quality service, though, was because they had grown big in a highly competitive market.
Anne McMeehan is director of communications at Autif