Fund managers get fat but serve up poor returns

RECENTLY, I received an earful from a leading fund manager. He was cross about the criticism his industry gets from personal finance journalists about the fees they charge on actively managed funds.

‘Unfair’ was one of the politer words he used. In particular, he disliked the way people in my profession attacked the fees charged by active fund managers, while praising index trackers for their low charges – even though they can never beat the index.

Unfortunately for him and his colleagues, journalists are not the only people voicing criticism.

Last week, the Financial Conduct Authority reported its findings that many fund groups were still providing a confusing menu of fees in their literature, making it difficult for customers to know what their manager was charging for ongoing costs, such as share trading or advertising.

It would prefer managers to spell out all charges in a single figure so it is easier to make comparisons.

I’m all for paying Michelin-starred prices if I get gourmet returns – but have no appetite for paying these prices by stealth, only to be delivered greasy-spoon growth.

Good fund managers earn their fees because they use research, analysis and their brains to beat the index. It is the average and below average – and those that turn their funds into quasi index trackers – who deserve the real criticism. And there are plenty of them.

Research for The Mail on Sunday by fund analyst FE shows that as many as one in three failed to beat their index over the past ten years.

Website Candid Financial Advice, which has just published a guide – Lifting the Lid on the Cost of Advice – also did some sums for us on how charges eat your investments. In a fantasy world, without charges, if you invested £25,000 and assumed annual growth of 6 per cent it would blossom into £33,456 over five years.

In the real world, where a lowcost tracker charges 0.15 per cent, you get £33,220 – just £236 is lost in charges. In one of the most expensive funds, charging 2.4 per cent a year, that sum would grow to just £29,836 – with £3,620 having been gobbled up in charges. Over 20 years, a tracker takes £2,239 but the expensive fund swallows more than ten times that, at £29,463.

Investors can take some control over what they pay. While many fund managers make an initial charge if you buy direct from them – and an annual management charge – you can avoid the full initial charge and halve the annual fee by buying through an online broker.

ONE fund manager who won’t be offering his funds directly to ordinary folk (unless you have a spare £150,000) is Neil Woodford. The former star manager of Invesco Perpetual, where he produced a 25-fold return on investor money on its high-income fund over 25 years – double the returns of the stock market – is launching his first solo fund in June from his new venture Woodford Investment Management.

Last week, at an event aimed at drumming up interest in his new fund, Woodford confirmed that he would be applying the same strategy that he used at Invesco – including picking shares likely to produce sustained dividend increases as well as capital growth. Tobacco and pharmaceuticals will feature as before, but he has added a bank, HSBC, for the first time since 2003. He says it is a cheap share ‘on the path to repair’.

Woodford also has his eyes on unlisted early-stage businesses with growth potential, particularly those involved in scientific discovery – he has based himself in Oxford to tap the best brains.

He gave the impression that he hoped to provide tasty returns over the long-term (including a 4 per cent yield). He certainly won’t be trying the pseudo-index trick. He said: ‘If you invest in my fund, you invest in my portfolio, not in the stockmarket.’

Woodford may be focusing on the investments, but he is also keen to offer good value to his clients. He has promised to absorb a lot of additional costs and make costs more transparent.

‘We take charges seriously – and the regulator is on to them,’ he said. ‘With this fund we have the opportunity to take the lead.’ It was all possible in his new lean organisation, where administration and technology was outsourced to keep costs down, he said.

For most retail investors going through brokers this means the fund’s total ongoing charge will be 0.75 per cent a year – or 0.65 if they go through the largest. The charges get three stars from me – let’s hope performance will be Master Chef quality, too.

I’ve no appetite for paying these prices only to be delivered greasy spoon growth