View more on these topics

The charge of the fund brigade

The IMA&#39s rubbishing of Ron Sandler&#39s assertion that no correlation exists between fund charges and performance has sparked a war of words between its chief executive and the Treasury.

After analysing the same data as Sandler, IMA head Richard Saunders last week made clear his belief the Treasury-backed report was wrong and that the figures it used proved the IMA&#39s view that a strong relationship exists between the two.

In particular, the IMA believes the data show that for every 1 per cent increase in fund cost there is a 2.5 per cent boost in performance on average and that 75 per cent of funds with higher charges than the cheapest fund have outperformed it.

But the Treasury strongly refutes these claims and says the IMA – and Saunders in particular – has got it wrong.

A spokesman says: “Saunders&#39 interpretation is not statistically meaningful and he knows it. There is no correlation between the price and performance of funds.”

But while the Treasury has been quick to hit back at Saunders, it has been far less vocal about how Sandler came to his conclusions.

The data he used – which tracked gross annual UK unit trust performance over the past 10 years – were supplied by Standard & Poor&#39s but analysed by consultants Booz Allen Hamilton, which investigated investment efficiency as part of a wider report into the life and pensions industry.

It provided the Treasury with “an array of analysis” but has been quick to point out it was not responsible for the conclusions drawn in Sandler&#39s report. Senior associate Tim Young says: “The Sandler team found some of the research of interest and it was open to interpret it. But we did not have authorship over any of the text nor any input over the conclusions drawn from our analysis.”

The IMA believes Sandler has simply misinterpreted BAH&#39s work, somehow managing to draw conclusions which are the polar opposite of its own.

As the clearest example of this it points to a graph in the report which Sandler used to claim there is no correlation between charges and performance.

The IMA believes the graph has been erroneously interpreted by Sandler and actually proves a link between the higher charges and superior returns.

It plans to send its own interpretation of the graph to the Sandler team in the near future, as soon as it has completed its proposed response to the report.

Its decision to lobby the Treasury will certainly be well supported by most fund managers, many of which reacted with disbelief at some of the accusations in Sandler&#39s report. But not all IFAs agree that Sandler&#39s interpretation of the data – false or otherwise – is particularly important, although they oppose many of his recommendations.

Bates Investment head of research James Dalby says: “I can see why both sides differ but it is not such a black and white issue. There will be higher-charging funds that do not deliver but equally there are others that are expensive and substantially outperform. You can read many things into the same research.”

However, Dalby believes Sandler is mistaken to push the case for trackers when the market is far more suited to stockpicking funds. This is a view echoed by many other IFAs who say their own experiences have shown them that Sandler&#39s arguments – and the methods he has employed to support them – do not stand up.

Hargreaves Lansdown investment manager Ben Yearsley says: “It is a bit like the old adage of lies, damn lies and statistics. The problem is that trackers are the cheapest funds and Sandler thinks they are the greatest things since sliced bread. Over 10 years, it is true that trackers have outperformed but over the past five years it is a different story. Sandler has based his view on long-term past performance and an ability to massage the figures.”

The IMA agrees, believing Sandler has failed to take into account the possibility of poor market conditions over the next few years. But ultimately Sandler&#39s recommendations matter only if the FSA integrates them with its final plans for depolarisation.

Many industry observers believe it will not – they claim that CP121 is very much the main focus for the regulator and that the Sandler report may at best be a diversion. But Saunders fears it will given far greater consideration.

He says: “I think the FSA is going to pay close attention to Sandler because he is published with the backing of the Treasury. I am sure they will give a heavy weight to it.”

The FSA, however, says it will give Sandler&#39s report no more weight than any other response to CP121. But it is clear that Saunders does not believe the regulator can afford to take Sandler lightly,particularly when many of his recommendations were welcomed.

Saunders is intent on nipping this part of the report in the bud but given the Treasury&#39s unequivocal response to his criticism there is a good chance it will fall on deaf ears.

What remains unclear is what action might be taken in response to Sandler&#39s conclusions. Unlike with-profits, there is little in terms of concrete recommendations to follow on from the criticism of active management. Worryingly for fund managers, it could set the tone for Government policy for the next few years.

Recommended

1 in 4 companies offer PMI with benefits says Bland Bankart

Almost one in four UK companies now offer private medical insurance as part of their employee benefit strategy according to risk management group Bland Bankart.The changes in employer attitudes are due to growing concerns over the shortage of funding for the NHS and long waiting lists for public treatment the firm says.As a result of […]

Homewatch UK wound up by DTI

The DTI has taken action to wind up mortgage broker Homewatch UK after it gave misleading advice to around 85 customers, leaving them facing big shortfalls in their mortgage repayments.The firm, of Somers Road, Rugby, sold only one type of product despite claims that it was searching the market for the most suitable loans.The product, […]

Unicorn Asset Management – UK Smaller Companies Fund

Friday, 9 August 2002 Type: Oeic Aim: Growth by investing in UK smaller companies Minimum investment: Lump sum £2,500, monthly £100 Investment split: 100% in UK smaller companies Isa link: No Pep transfers: No Charges: Initial 5.5%, annual 1.5% A shares, 1.25% B shares Commission: Initial 0.25%, renewal 0.25% Tel: 020 7292 0825

Exchange sets up quotation service

The Exchange is offering a comparative quotation service that enables IFAs to compare pension products and providers on retirement benefits, fund values, charges, transfer values and product features.The service gives compliant customer-specific quotes and illustrations for individual pension products and is supported by Clerical Medical, Friends Provident, Norwich Union, Scottish Mutual, Skandia and Standard Life.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment