fund groups?
nd rebates,
outperforming at a cost
that is only fractionally
higher than a passive fund.
l Cheaper costs
These new launches are
also recognition that the
cost of active management
will come down in
a post-RDR world. Berens
believes that the reason
fund costs are high now is
because they include plat-
form charges and advice
charges – through rebates
– priced in. But post-RDR
these will be paid by the
consumer direct to the
adviser, and the adviser
direct to the platform.
“The headline cost
of fund management is
going to fall dramatically
from retail share classes
as people move to an
institutional factory gate
price because all of that is
stripped out – that makes
active management considerably
more attractive than
it is today,” he explains.
But for Ellis, whose
Legal & General market a
range of passives, low-cost
active funds represent a
“middle ground” solution.
He remarks: “We already
have a range of passive
funds, so our view is that
if you want to buy beta
you buy beta, and if you
want to buy alpha you buy
alpha, and these funds in
the middle are a toxic combination
of the two, saying
they will have low fees and
low alpha. If I want alpha,
I will pay for it. They are
a compromise product, an
experiment to see how the
low-cost world will evolve.”
l Talent spotting
One thing that fund
groups do agree on is that
proven alpha-generating
fund managers should be
CHALLENGE OF CREATING ADDITIONAL SHARE CLASSES
At least three share classes for each fund may be required: the existing share class will need to be
maintained for existing business, a non-advised factory gate share class that strips out all adviser charges,
and a hybrid share class that provides some type of remuneration, if allowed, to platforms. A number of
challenges need to be considered:
� Outsource providers: will the outsourcer have the capacity to cope?
� Marketing material: the mandatory inclusion of the Key Investor Information Document (KIID) within
Ucits IV is required by July 2012 at a share class level.
� Pricing: daily-priced funds require share class values to be calculated and published in narrow time
windows, increasing pressure on pricing terms due to the number of share classes that require sign-off.
� Expenses – fund groups will have to administer expenses and charges across an increased number of
share classes and careful monitoring will be required to ensure share class divergence does not occur.
� Total expense ratios (TERs) – maintaining robust controls surrounding TER calculation and publication
will be complicated with the large rise in share classes.
Source: Deloitte, ‘Responding to the RDR: Shaking Up Investment Management?’
rewarded for their talents,
probably with a different
pricing regime for their
funds. This in turn may go
some way to addressing a
pertinent problem within
the industry today – that of
a bunching of client assets
with a small group of star
fund managers. This arguably
leads to funds that are
too large and inflexible for
the fund manager to make
the most of their talent.
Tony Stenning, head
of UK retail at BlackRock,
foresees more funds being
capped at a reasonable size.
He says: “The ability to
add alpha in some of those
large funds gets more difficult
if you keep multiplying
the size of the vehicle,
whereas if you invested in
the index you can keep
your core at a very low rate.
Then product providers can
keep fund sizes at an optimum
level to maximise the
outperformance criteria that
you can achieve.
“Investors will have to
pay for that, which may
lead to a greater prevalence
of performance fees,
not just in one way that
only the manager makes
money on top of the flat
fee; it might be that the
flat fee is lower, but the
performance fee is on top
and if you do continue to
outperform, you do make
more money. Overall, the
net effect of the investment
VIEWPOINT RETAIL DISTRIBUTION REVIEW
is probably a better return
for less money.”
l Establishing goals
Austin McBride, head of
UK retail at Ignis Asset
Management, stresses that,
in an industry where trends
for fashionable investments
often hold sway, it is no
longer just enough for fund
groups to deliver the same
products as everyone else,
and clear goals must be set
out for performance targets.
“Things have to be innovative,
scalable and solutions-led,”
he says. “There
are too many ‘me too’
funds. It is good to concentrate
on those managers
who are perceived to be
able to deliver alpha, but
we should not forget investors
also want those that
offer disaster avoidance.”
The final word goes to
Andrew Power, RDR lead
partner, and Eliza Dungworth,
head of investment
management, who coauthored
Deloitte’s report
‘Responding to the Retail
Distribution Review: Shaking
Up Investment Management?’
They argue the
changes will transform the
investment market more
than many investment managers
expect and a clear
strategic response from
each fund group is vital.
They conclude: “As platforms
under RDR will need
to be unbiased, they cannot
promote some products
to the detriment of others
and this puts more onus
on investment managers
to be clear about why
advisers should use their
offering. The more their
existing model needs to
change in order to remain
visible, the greater the pressure
will be on an investment
manager to reduce
costs, while simultaneously
developing new, innovative
propositions.”
“
Things have to be
innovative, scalable
and solutions-led.
There are too many
‘me too’ funds. It is
good to concentrate
on those managers
who are perceived
to be able to deliver
alpha, but we should
not forget investors
also want those
that offer disaster
avoidance
”
Austin McBride, head of UK
retail, Ignis Asset Management
JANUARY 2012 [www.portfolio-adviser.com] PORTFOLIO ADVISER
21
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