Governance is key as dispute rocks asset management industry

Figures compiled from 1,350 retail equity fund accounts showed that funds outperformed their relevant benchmarks by more than the total of their transaction costs and ongoing charge figures.

Despite the findings, schemes were urged to tighten their governance and require asset managers to provide necessary data on costs.

The IA, which conducted the study in cooperation with fund research company Fitz Partners, said the results suggested “there are not hidden fees in funds”.

Similarly, it said the 40 per cent portfolio turnover rate uncovered by the survey dispelled the belief that fund managers extract higher fees from clients by overtrading.

A spokesperson said: “The criticism that we have had in the past is that there are major hidden costs and these amount to several multiples of ongoing charges.”

“We thought that if that were really the case, then there would be no chance whatsoever that fund returns would be higher than the benchmark returns; actually we’d expect that it would be lower than benchmark returns by several per cent. We found this is not the case.”

Despite the findings, the asset management body has elsewhere stated its commitment to transparency, announcing that it will publish a disclosure code for members later this year.

It has also set up a Cost Disclosure Advisory Board, focusing on improving cost transparency. The minutes of its first meeting in July have not been made public, with discussions on how to report on the board's progress still continuing.

The IA spokesperson added: “The investment management industry is committed to putting its customers first and continuing the work already done to ensure that consumers receive clear, comparable and informative information on which they can make investment decisions.”

Nessie v Mr Hyde

Adding to the dispute's pantheon of monsters, Andy Agathangelou, founder of campaign group the Transparency Task Force, highlighted the 'Jekyll and Hyde' contrast between the IA’s efforts to combat opacity and the conclusion drawn in the study.

He questioned the methodology of the survey, adding that a study of the entire industry could not highlight severe, if relatively rare, instances of hidden costs.

The IA contended that its methodology was entirely suitable, and that the survey included all costs associated with fund management.

“The reality is that there are situations where the hidden costs are actually many multiples of the headline costs being disclosed,” said Agathangelou, who also sits on the IA’s advisory board.

“For example there are funds where the turnover is so high that the only conclusion you can possibly come to is that the activity by the asset manager in those particular circumstances [...] was driven by the desire to secretly raise revenues off the back of a generally well-performing fund.”

He said consolidation in the defined benefit sector and the creation of cost-reduction consultancy services might help smaller schemes follow the lead of the Railways Pension Scheme, which has appointed a specialist to track down cost inefficiencies.

He also encouraged trustees to stipulate in investment mandates that any information relating to costs must be made available to them. The Pensions Regulator's revised defined contribution code also asks trustees to take "account of the total level of costs and charges levied on each fund".

Lean on lawyers

Chris Roberts, trustee representative at Dalriada Trustees, also urged trustees to insist on access to data and independent review, but said that opacity was more problematic when dealing with fiduciary managers.

“Anyone who’s entering active management needs to understand what they are buying and who’s selling it,” he said. “We believe, where there is a fiduciary adviser who is also ultimately the investment adviser and actuary, that there is a need for independent review, because these charges are quite often far from transparent.”

While trustees should trust their fund managers, he warned against giving “carte blanche” in investment mandates, because while returns might be strong, decisions made by managers might seriously affect the scheme’s risk profile.

“I have a feeling a lot of trustee boards probably assume because ‘XY’ consultant has looked at it it’s fine, but ‘XY’ consultant’s agreement will invariably say that they aren’t legal advisers,” he added.

“Therefore it’s important, especially when entering into actively managed funds, that they take a little bit of a lead from their lawyers, which I think is a step that is often missed.”