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Evening Standard
Evening Standard
Alan Miller

What will the investment dinosaurs do?

The UK’s investment dinosaurs are in a mess, they have grown very fat over many years feasting on more victims (clients) but they are now facing a dire future for the following reasons

  1. More clients are either bypassing them completely buying low-cost index funds via low-cost investment platforms or using a low-cost intermediary to cut out costs.
  2. More clients know how much they are paying and have discovered the basic maths that if you are paying 2% per annum for a return of say 5% per annum, you are losing 40% of your returns in costs.
  3. TINA (There Is No Alternative) has gone – when cash gave you no return there was no alternative to investing. You can now get 4% to 5% in cash. Do you really need that slick but expensive fund manager anymore?
  4. There is no great extra return by paying more fees to some hotshot as the markets are more efficient than in the past – everyone be they private or institutional gets the same information at the same time making it impossible in most markets to have some long-lasting edge. This is why every day you see the ‘stars’ retiring before they become ‘fallen angels’.

The stock market and clients recognise these issues, but the major fund groups do not.

Many have resorted to major mergers but merging two dying businesses may save costs and thereby boosts profits at the beginning but does not change the fundamental issues unless the company either has a significant cost and fee advantage or can offer something vastly superior to the peers. The average fund management company is currently rated on about 12x earnings, which is a much lower valuation than the 18x multiple they received from 2018 to 2020, when the market was more optimistic about their prospects.

Major mergers/takeovers have been little short of disastrous – ABRDN has fallen by more than a third since it announced its merger with Standard Life in March 2017, Jupiter has fallen by two thirds since it announced its merger with Merian in February 2020.

So far in 2023, the UK stock market is up 3.7% but many of the retail orientated fund managers share prices are being shredded – for example St James’s Place share price is down 23%, ABRDN is 12% down, and Jupiter is 23% down. Some of these companies are being forced to reduce their fees but it is still small beer – recently St James’ Place announced that it was capping annual management charges on bond and pension contributions for clients who have been invested for over ten years. This will immediately cut the fees but for just 65,000 of its 941,000 overall clients.

Recent research from Numis has shown that the typical fees of a UK IFA (Independent Financial Advisor) or most large wealth managers is at least 2% per annum. There is a famous book about a visitor who admired the yachts of the bankers and brokers, entitled ‘Where are the Customers’ Yachts?

It transpired that none of the customers could afford yachts, even though they dutifully followed the advice of their bankers and brokers. The same seems to be true of many retail fund managers in the UK based on the latest SCM Direct estimates. We analysed the Investment Association funds run by the following major listed UK plc’s – M&G, ABRDN, Jupiter, Liontrust, Schroders, Quilters, and Rathbones.

In all it amounted to 417 funds with a total invested of £222 Bn. We looked at the performance of the main share classes of each fund and their fees – of course different fund groups will have different biases to different asset classes. Based on the fund’s current size and fees, he then estimated the returns made by an investor investing across the manager’s entire retail range according to fund size (analysing the funds with at least 5-year returns).

Overall, he found that an investor would have paid these managers £8.9 bn in fees over the last 5 years for the funds analysed. That amounted to a typical fee of c. 0.8% per annum and a typical gain of just 3% per annum.

Thus 20% of their gross returns, were eaten up in fees. ABRDN seems to have the biggest strategic issue as its average investor across the funds analysed would have made just 1.5% per annum over the last 5 years and seen nearly a third of their underlying returns eaten up by ABRDN’s charges.

The real problem is that more and more investors have spotted that the index funds have produced much higher returns over the last 5 years (nearly double the traditional fund managers) whilst charging a quarter of their fees, so they spend just 3% instead of 20% of their underlying returns in fees.

The fund groups need to wake up and smell the coffee, their desperate mergers will help short term profits by one off cost reductions, but not change the long term fundamental outlook which is dire. They need to radically reduce their charges to make themselves more competitive – at the moment it seems to look like a cartel in terms of pricing to keep prices high. The problem is that customers have spotted this.

Alan Miller is the chief investment officer of SCM Direct

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