Friday 11 June 2010

Are fund managers too greedy?

When most of us want to earn more money we have to work harder or more productively. But for fund managers it’s a lot easier, they just hike their fees - usually with little justification..

There have been plenty of examples in the past. In June 2004 Invesco Perpetual raised the annual charge on several funds, including Neil Woodford’s High Income fund, from 1.25% to 1.50%, boosting revenue by over £13 million a year since then.


And the fund managers running absolute return funds seem to have settled on a norm of 1.5% annual charges PLUS 20% of all positive returns (in some cases returns above cash). I guess investors put up with it because there’s little alternative, but this smacks of an informal cartel to me.


Annual management charges are fine, as are performance fees, provided they’re fair and align a fund manager’s interests with those of investors (and, of course, the manager delivers value for money). But in fund management this seems more the exception than the norm.


Where performance fees are charged I’d expect to see a reduction in the standard annual management fee. So if a manager doesn’t deliver they earn less than usual and if they perform well they can earn more than usual. But such funds are scarce; it’s easier finding a needle in a haystack.


Absolute return funds are a good idea, but the only guaranteed winner is the fund manager. They’ll pocket around 1.5% of your money each year come what may, and if they do manage to make you some money they’ll take a fifth of that too. At the very least these managers should set a reasonably demanding annual target, say between 5-10%, before they can take their cut.


In defence of the above examples, they’re transparent. The fees might be steep, but investors can clearly see what they’ll pay before investing. Arguably more worrying is Legal & General's far sneakier rise in charges.


When you buy and sell unit trusts and oeics the price you pay or receive will depend on whether the manager has to create or cancel units in the fund. If the manager has to create new units they’ll incur stamp duty, dealing costs and spreads on the underlying investments, passed onto you via an increase in the price you pay for units. And when a manager cancels units they’ll build dealing costs and spreads into the price they offer you (see our unit trusts page for a more detailed description of fund pricing).


Most funds take the sensible approach that when there are both buyers and sellers they can pass units from one to the other and if there’s a net surplus units will be priced at either creation or cancellation prices as appropriate.


But Legal & General has decided to always sell units at the creation price and buy them at the cancellation price, even if they’re simply passing units between buyers and sellers.


Does this matter? On mainstream funds the difference is typically up to 1%, but on smaller companies and property funds the difference is more usually around 5%. Easy money for L&G and a worse deal for investors.


I can’t see fund managers voluntarily reducing their revenues so any catalyst for change will have to come from investors. And therein lays the problem. Billions of pounds continue to sit in underperforming funds, so if investors are generally too lazy to react to failing fund managers I think it’s unlikely they’ll ever protest against expensive ones.

Read this article at http://www.candidmoney.com/articles/article118.aspx

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