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Lining up for low-cost route

Fidelity and HSBC are the latest firms to offer low-cost fund alternatives as asset managers look to meet the demands of cost-conscious investors and anticipate the RDR price squeeze.

HSBC Global Asset Management launched three low-cost passive funds with active asset allocation, the HSBC world index range, last week.

Fidelity launched three low-cost funds earlier this month – multi-asset allocator defensive, multi-asset allocator balanced and multi-asset allocator growth . The funds with an active asset allocation invest in passives and have a clean fee share class of 0.5 per cent.

In February, JP Morgan launched a low-cost active fund with a maximum total expense ratio of 0.55 per cent. Schroders added three low-cost funds this year with capped TERs of between 0.4 and 0.5 per cent.

Vanguard launched five Lifestrategy funds, which are funds of passive funds with a set asset allocation in June this year.

But not all investment firms are looking at the low-cost route. Investec UK managing director David Aird says “We will not be a low-cost provider of investment solutions. We will be a provider of good value solutions. We are unashamedly active and we will be fairly priced rather than cheaply priced. Asset allocation is the toughest game to get right and has to be properly paid for by investors.”

“Both in retail and institutional, portfolio constructions are taking a barbell approach and are using cheap beta through the likes of ETFs and using more expensive active managers that really outperform. You might find those active funds charging low fees, with a performance target that is very low after fees, may be in a no man’s land.”

Legal & General Invest-ments managing director Simon Ellis says low-cost active funds have more downside than upside. He says: “What creates the asymmetry in these low-cost active funds is when you add fees on to the downside and take them off the upside. The problem with some of these products is they are deliberately constraining the fund manager’s alpha. They are saying it is worth having limited alpha if it has a lower fee. This concept of a toxic tracker disappeared in the institutional market almost 15 years ago.”

However, Ellis is more positive on offerings using passive funds but active asset allocation. He says: “Multi-asset is a different thing altogether. Looking at the assembly of multiple beta in a mix of assets with tactical asset allocation, there is a skill with this asset allocation and that is worth paying for.”

But Schroders head of intermediary sales Robin Stoakley says: “If you look at our two funds, global and UK core, that are benchmarked against an index, the performance target is outperforming 1 per cent after charges. That does not mean that drawdown relative to their upside would be any more than it would be on a more expensive, more aggressive actively managed fund with higher performance objective.”

In response to criticism that portfolio turnover costs on these type of low-cost funds detract from returns, he says: “The average length of holding for our UK core fund is five years and the turnover is likely to be 20 per cent, which is significantly less than most others active funds in the market.”

The £8m Schroders dynamic multi-asset fund, launched in July, targets CPI plus 4 per cent net of fees over a market cycle of five years. Its TER is capped at 0.5 per cent and it uses diversification to reduce the risk.

JP Morgan head of UK intermediary sales Jasper Berens says further launches in the low-cost area depend on how popular its £59.9m JPM UK active index plus fund becomes. He says: “If I see significant inflows over the next six months, we will consider launching another version of it.

“Active fees are coming down after the RDR because charges are being stripped out and the argument for only using passive changes.

“If advisers looking for low-cost solutions for clients do not consider active low-cost funds and only consider passive funds, I think they are going to face a treating customers fairly issue.”

“For financial advisers who only recommend one provider’s set of passive products, it is going to be difficult to consider them as anything other than restricted.”

Vanguard head of sales Nick Blake has chosen a set allocation for the LifeStrategy funds. He says: “You will often hear asset allocation is responsible for 90 per cent of returns but research suggests it is responsible for the variability of returns. Over the long term, markets will revert to the mean. It is difficult to get timing right in investment decisions.

“The trick to rebalancing is to work out how frequently we should rebalance to get the port-folio back to where it is but not so frequently as it is costing more than the benefit of doing it. We use cashflow to make sure the portfolios always stay balanced.”

Blake says if they do not have that cashflow to rebalance, the firm rebal-ances them once a year and only if the portfolio has drifted more than 5 per cent from its set target.

HSBC Global Asset Management has chosen active asset allocation for its range. Head of UK external distribution Phil Reid says: “Asset allocation is a key driver of returns. It would not make sense to eliminate that at the outset. If you are providing a beta product, then the only driver you have on returns is getting the asset allocation right.

“Rebalancing is key. If one market does better than another market, you tend to get a drift in your asset allocation. We will rebalance according to our views on market over time – every six months to a year. It is essential to make sure the product is pointed in the direction you want it to be.”

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  1. I read some more comments from Simon Ellis on his blog that seem to make sense to me. http://simonellis.wordpress.com/

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