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Product Matters

A few weeks ago, this newspaper was very kind to publish some thoughts from us regarding the unintended effect of factory gate pricing and transparency.

Our position was that while nearly all are in favour of the removal of the vagaries of commission pricing and bias, we should not rush headlong into an alternative without thinking through the outcome.

In short, FGP can only lead to a more expensive product for the consumer and if we are to proceed in this way, we need to rethink not only the value chain but also the costs.

The article provoked a large number of enquiries, most in support, with a large number asking for suggested solutions.

We have worked closely with 7IM recently and have discussed these concerns at length. We would support the notion of its new Asset Allocated Passives which, in short, follow 7IM’s proven tactical asset allocation but populate the portfolio where possible with passive instruments such as ETFs. The results of this approach are interesting and should be considered further.

7IM estimates that the average TER for an active multi-manager fund, before wrapper and IFA trail, is around 1.6 per cent whereas the AAP fund starts life with a TER of 0.98 per cent which reduces as the fund grows to a level of 0.75 per cent.

The challenge to the fund management industry is clear. All firms say that they can beat the index, all say they create alpha but can they all confidently predict that they can outperform the passive security by nearly 1 per cent a year?

In a bear market, investors look at net returns as opposed to bull markets when investors tend to seek gross returns.

Historically, there has been no alternative solution other than active expensive funds.

Now there is choice and that can only be a good thing for all concerned, except, of course, a manager who does not perform.

Alan Easter is head of strategy and distribution at Money Portal

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