Advisers and trustees need to be far more demanding of fund managers about the true cost of funds, said Chris Sier of Stonefish Consulting in a well-received speech at the Corporate Adviser Summit in Hook yesterday.
Sier pointed to his own research that showed one local government scheme that had seen portfolio turnover of 3,800 per cent in a single year as evidence of how fund managers were taking trustees and pension consultants ‘for mugs’, in a warmly-received presentation that saw delegates demanding further information of the sorts of detailed questions they should be asking fund managers about the funds they recommend.
“Cost is important because we know so little about it. TPR implied that knowing about costs is not that important. I absolutely, whole heartedly disagree. How many people would purchase a fridge without knowing how much it costs and if it will work in the future?”
Sier’s strong views on charges are based on his own experience in the fund management industry and data extracted from the Local Government Pension Scheme (LGPS) and the IMA, via thousands of FOIA requests.
His research indicated that the cheapest funds perform better routinely than the dearest funds and that costs are a better indicator of performance than performance itself. Even the TER does not reflect the true cost of ownership as it excludes other costs, such as foreign exchange.
“There is no one figure that captures all these costs, regardless of what the IMA says. Reducing costs by 1 per cent improves your pension fund performance by 25 per cent.”
He said evaluating costs was difficult because there is no standard measure, pension fund do not swap information on what they pay and fund charges are often rolled up into the annual investment return. In addition, many fund management services are outsourced to providers with their own conflicts of interest.
Layers of charges include administration, custody, trading charges for fixed income and equities, alternative trading charges, stamp duty and foreign exchange, while income from interest on cash and income from securities lending were rarely passed onto investors. A fund manager or custodian could make 10 per cent a year on securities lending that it kept for itself.
He said other asset classes, such as private equity, fixed income, property and hedge funds were even more expensive and opaque, but there was some transparency on soft [equity] commissions, as a result of the Myners report in 2001.
The difference between execution only commission and those charged to clients was due to the cost of research, which benefited the fund manager, not the client. “Since Myners, commission went from 20 bps to 11 bps on £100m of turnover, but the volume has doubled since 2001, so they’re still earning more commission than before. So brokers demanded increased turnover from fund managers to maintain a comparable income.
Sier found that for LGPSs, the average portfolio turnover rate (PTR) on a Europe (ex UK) portfolio was 96 per cent, and 81 per cent for retail funds. On US equity funds, PTR was 88 per cent for retail funds and 112 per cent for LGPS.
For all fund types, average portfolio churn was 60-80 per cent, but for outliers it was 140-3,800 per cent.
“Broadly, the value of funds churned this way went down roughly by the amount of stamp duty payable on that 3,800 per cent.” Sier also quoted Paul Woolley of the London School of Economics’ belief that 75 per cent of returns from equities comes from income events, rather than price movements.
He said: “You guys own the UK equity market, so get the data. It is your data, it is your clients’ data, so go and get it.”