Peeling back the layers: The Mifid II effect on fund of fund fees
By Valentina Romeo
Firms that offer multi-manager funds have defended their strategies following mounting pressure on the industry in light of new cost disclosure rules.
Concerns exist that multi-manager funds, which are by nature more expensive than single strategy funds, would have even higher costs when transaction fees are put under the spotlight. Money Marketing has analysed some of the most popular multi-manager funds to see if advisers need to tighten their due diligence procedures.
‘Optically lower fees’
Since Mifid II came into force on 3 January, investment managers have had to disclose fund transaction costs separately from the ongoing charges figure. While clients may not be paying more than they were before, they can now clearly see how much transaction costs contribute to the total.
Last month, research by the Lang Cat revealed some investors have been paying a third more in transaction costs on some funds than previously thought. Now, Money Marketing analysis shows investors in some multi-manager funds are being charged on average 16 per cent more than was originally advertised.
The FE data for the top 30 multi-manager funds by assets under management reveals investors in the Vanguard LifeStrategy 40% Equity fund have been paying as much as 54.5 per cent more in additional transaction fees than previously disclosed.
Across the 30 funds analysed, the “total cost of ownership”, which includes the ongoing charges figure and transaction costs, is 1.56 per cent on average.
The Jupiter Merlin multi-manager range is one of the most popular among investors and the £2.8bn Jupiter Merlin Income Portfolio, the £1.9bn Jupiter Merlin Growth Portfolio and the £1.7bn Jupiter Merlin Balanced portfolio funds feature in the FE analysis.
The income portfolio fund carries a total cost of 2.5 per cent, and the growth portfolio and balanced portfolio funds both have a total costs of 2.69 per cent. Of that trio of funds, over a five-year period, only the Jupiter Merlin Income Portfolio has underperformed the multi-manager managed sector returning 25.9 per cent versus the 41.5 per cent for the benchmark, according to FE.
Jupiter Asset Management Merlin fund range head John Chatfeild-Roberts admits costs for his range might be higher than average but warns investors to be wary of what is claimed to be its competition, such as model portfolios.
He says: “Some argue distributors’ model portfolios, dressed up as personalised investments with optically lower fees, are better, cheaper alternatives to multi-manager funds.
“The counter argument is that they are often opaque sub-optimal solutions, lacking the tax efficiencies of unitised multi-manager funds, another important factor when weighing up the total value of seemingly comparable products.”
Chatfeild-Roberts claims multi-managers make the same judgement as clients about funds when building portfolios. He says: “Where we are able to negotiate discounted fees, we will do so and pass them on fully to our investors. However, some of the best performing funds in the portfolios net of fees are those with the highest charges.”
“History shows it would have been plain daft to have turned those opportunities away simply because the fees were high: outperformance net of fees is the key. We deal when we need to and endeavour to keep frictional transaction costs down. Generally our portfolios have low average turnover.”
Value for money should be top of advisers’ minds
The current debate around fund charges and transaction costs is welcome and long overdue. However, the question advisers should be asking themselves is: “so what?”
The answer lies in the Conduct of Business Sourcebook, specifically COBS 6.1A.16 G. This states that “in order to meet its responsibilities under the client’s best interests rule and Principle 6 (Customers’ interests), a firm should consider whether the personal recommendation or any other related service is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account”.
Last year, we looked at the costs of a range of investment solutions, including the entire multi-asset/multi-manager universe. For these funds, the average OCF was 1.06 per cent. As everyone now knows, transaction fees can vary, but based on data supplied by Trustnet looking at the top 100 selling funds from 2017 average at 0.22 per cent.
For an adviser to meet their long-standing COBS guidance, it’s vital they consider the total cost of ownership. Fund costs are now more transparent than they have ever been. Platform charges are normally reasonably easy to work out and advisers will know better than anyone what they are charging. Add these costs together and then you have the total cost of investing.
So, is this of value? As COBS states, this is for the adviser to consider. We would suggest that any advice firm certainly needs to have a house view on this question, and perhaps a level of total cost which they would view as unreasonable.
Beyond this, there are also wider questions of value for money. Is it value for money to pay an OCF plus transaction fee above the market average?
Some of the bestselling multi-asset funds certainly fall into this category. Is it value for money to hold the fund on a platform, and charge an ongoing fee if the client has relatively simple needs? Again, we would suggest advisers need to consider these questions, and perhaps revisit them in light of the new fund cost transparency.
Mike Barrett is consulting director at the Lang Cat
Ongoing charges first
A third of advised investors hold multi-manager funds compared with 20 per cent of clients who invest in single strategy funds, according to Platforum data.
Platforum says 83 per cent of advisers cite investment performance as one of the top three factors when selecting multi-manager funds, while nearly two-thirds (61 per cent) of advisers include fees and charges that are lower than those charged by DFMs in their top-three factors.
Nearly half of the funds in the Money Marketing analysis have underperformed their sectors over five years. Notably, seven out of the 30 funds in the sample invest in external funds, while the remaining invest in in-house funds. This makes a difference when it comes to cost.
Fund giant Aberdeen Standard Investments invests in in-house funds for most of the funds in its £10bn MyFolio range. The firm explains that the methodology for calculating transaction costs, either with the Priips or Mifid II template, works equally for both in-house managed funds and externally managed funds. Transaction cost information is also required to be gathered from the managers of the underlying funds.
But Aberdeen Standard Investments investment director Iain McLeod says when advisers or individual investors compare the costs of one multi-manager to another, the OCF should be the primary cost to look for.
The group has recently reduced the annual management and platform charges on the flagship funds by more than 30 basis points following a review. The multi-manager range within MyFolio shows an average total cost of 1.22 per cent now that transaction costs are disclosed. The average OCF for the funds is 1.19 per cent.
McLeod says: “Multi-manager funds, by their very nature, have always had fees charged by the manager for portfolio construction and fees payable to underlying fund managers for managing the assets. Within the latter, transactional costs always existed but now have to be disclosed by the underlying manager.”
“We support transparency of charges, but it should be remembered that the change in disclosure rules has not changed the total expenses that are borne by a fund. As such, we see no reason why a multi-manager fund is any more or any less suitable for a client than it would have been prior to Mifid II disclosure.”
Claire Walsh, Aspect8 financial adviser
“The more transparency there is of fees is a good thing. I wouldn’t recommend a [multi-manager fund] as a standard. There is still a challenge when you don’t know how much they charge.
Cheap isn’t necessarily best, but at the moment it is not a level playing field because you can’t see the full cost involved.”
While performance remains relatively positive for many multi-manager funds, the FCA is examining the suitability of some of these solutions, especially if advisers are charging a large ongoing fee on top of the investment and platform costs.
Hargreaves Lansdown has a popular suite of 10 multi-manager funds, including UK, income and growth, equity and bond, Asia and Europe strategies. The £3.2bn HL Multi-Manager Income and Growth fund and the £1.7bn HL Multi-Manager Special Situation funds have both outperformed their respective Investment Association sectors since launch and carry a total all-in cost of 1.9 per cent and 2.22 per cent respectively, which includes the 0.45 per cent platform fee. The transaction costs appear to be about 0.25 per cent.
Hargreaves Lansdown head of communications Danny Cox says increased disclosure hasn’t altered the suitability of multi-manager funds. He says: “Multi-managers suit investors who are looking for a managed solution, wrapped in a single tax-efficient investment. The structure enables investors to benefit from significant diversification, but it does mean the funds have a higher charge.”
He adds: “Financial advice isn’t all about recommending investments. Advisers add value to their client’s situations in a number of ways over and above the choice of investment. As with any service, it is important for the client to understand the value of the services they are receiving, not just the cost.”
Seven Investment Management investment manager Peter Sleep says the group blends passive and active strategies to bring costs down on its multi-manager funds. Data shows 63 per cent of 7IM users have clients invested in 7IM multi-manager or multi asset funds.
Sleep says: “Right now we are getting used to the new regulations. We are looking at historical costs and we have to estimate what our market impact costs are. I would expect over time for these costs to fall. We are now accountable for every penny.”
7IM multi-manager balanced funds have 0.14 per cent transaction costs. Overall in the other portfolios, it is below 20 basis points.