Good reads from around the Web.
Always nice to see the rich and the powerful do something good with their money. And so nice to see Neil Woodford, the famed fund manager, leading the way on fee transparency.
The Woodford Funds blog says:
From 1 April, investment research costs are being paid by Woodford, rather than by the fund with no increase to the existing annual management fee.
We also commit to greater transparency on the total cost of investing, with all transaction costs to be disclosed monthly on our website.
[…]
The cost of transacting is wrapped up in the cost of buying or selling assets within a fund – they are an inevitable part of investing. All stock market investors, whether fund managers or DIY investors, face these costs, which come in the form of commission and, when buying shares, Stamp Duty.
From 1 April, one element of the cost of transacting – that of research costs – are being paid by Woodford, rather than by the fund.
Importantly, we are not increasing our fees to cover this additional cost.
Investors are, in effect therefore, getting a price cut, which will immediately benefit the future performance of the fund.
Of course, some say this is all a big PR move. That Woodford is doing this because with his huge and loyal following he can get away with it.
Well if it’s a PR move then it’s probably an expensive one.
As for his huge and loyal following, Woodford achieved that through several decades of outperformance in various market conditions and now at two different companies, which personally I am happy to take as evidence of a unicorn-rare ability to beat the market through skill – at least in the past.
Perhaps he could have instead taken his huge and loyal following for a ride, and charged higher than average fees – just like all those famed hedge fund managers do, with their 2% charges and 20% performance fees?
Woodford went the other way. Good for him, I say.
Saint or scandal?
Robin Powell at The Evidence-Based Investor isn’t so easily impressed:
Neil Woodford can afford the smartest spin doctors, and it shows.
Hardly a day goes by without a Woodford story (almost invariably positive) in the media.
The latest success for his PR machine came this weekend, with the announcement that the Woodford Equity Income fund will now absorb its own research costs, rather than charging them to investors.
This is, of course, good news for investors, and let us hope that other fund managers will follow Woodford’s lead.
But it needs to be kept in context.
That Woodford Investment Management, along with almost every other UK fund management company, was asking investors to pay its research bill in the first place is a scandal.
Personally, I’m not that bothered about investors being charged for research. Scandal, for me, is far too strong a word.
The whole argument for paying for active fund management is so flawed in the majority of cases – for the simple fact that they fail to beat the market – that if you do find a fund manager who can consistently take the market behind the bike shed for a drubbing – to outperform, after all fees – then let them keep the lights on however they see fit, I say.
Complaining that an active fund manager who, for instance, trailed the index for a decade – and cost you 2% a year in fees and charges in doing so – partly reimbursed themselves through a 0.02% research bill seems to me a bit like being bothered that the alien walkers in War of the Worlds stood on your front lawn on their way to obliterating your village.
Moreover, charges in financial services are like Wac-A-Mole. If a fund manager wants to – and believes it can – take some particular annual tithe from its customers, it will find some combination of fees they will pay. At least research is (theoretically) useful to an investor.
Of course, I understand the other side of the argument – that investors are clueless about all these fees, and that by unbundling and revealing them they will become less happy to pay them, and so will pay less.
But will they? The experience from the unbundling that came with RDR was that for many (including some passive investors, due to higher platform charges) the cost of investing actually rose.
Anyone who does a day’s research will discover the cheapest and best way for most people to invest is through index funds on low-cost platforms.
If they are not already discovering that – or they don’t care – then is a long list of bullet points on the back of a factsheet detailing every last bill paid by a fund really going to change their mind?
Will the average consumer even read it?
I have my doubts.
What’s it worth?
Partly I am playing Devil’s Advocate here. Clearly everyone at Monevator Towers thinks such information is better out than in, for those who do want it.
But to be honest I find it hard to get overly worked up about it.
There are other issues to consider, too, such as the average consumers’ limited understanding of what fund charges actually describe.
As one industry commentator puts it in the FT (search result):
“[Mr Woodford] has launched a modern asset management business, performance has been excellent and I know he has a low turnover style,” said Mr McDermott.
“Some funds will trade more and have higher costs — but it’s not necessarily a worse fund. It’s important to look at the alpha generated.”
“It’s not as straightforward as ‘this one costs 84 basis points, this one costs 120 basis points and I’m going to buy the cheaper’,” he added.
One of the most consistent (and opaque) hedge fund managers in the world, Renaissance Technologies, has achieved annualized returns of over 35% a year for 20 years.
It is a quantitative trading house that uses vast warehouses of data to find patterns or inefficiencies in the market. I don’t have numbers on its annual portfolio turnover, but it’s routinely described as a pioneering high frequency trader. I imagine they’re huge.
If Renaissance’s edge is partly expressed through churning its portfolio, then investors who’ve made a fortune from it would have been ill-served by dumping it after receiving their first monthly investment letter that quoted a scarily high annual turnover.
High turnover is ruinous to most active funds. It is costly. Renaissance and most of the handful of other market-beating exceptions will never be accessible to you or me. And the average active fund’s cost is just a tax on your investments.
All true. But it requires a lot more understanding to discover this and to realize what it means for your future strategy than can be communicated by a lengthening list of fees in the small print – incomprehensible to most.
The end of an era, anyway
What I’m saying is that high fees are high fees, however they’re sliced and diced.
What will do for active fund managers is the realisation that they’re very rarely worth the price on the menu – and that cheap tracker funds can take their place – rather than a micro-investigation into how they charge for their ingredients.
Bloomberg calls this the financial services industry’s “Napster Moment”:
Just as record companies in the early 2000s had to deal painfully with the digitization of music courtesy of Napster and Apple Inc.’s iTunes, many asset managers are now facing a similar situation as more investors make the switch from high-priced, actively managed mutual funds to passive, low-cost, exchange-traded funds (ETFs) and index funds.
When the dust settles in this sea change, the financial industry may be half of what it once was, simply because its revenues will be half of what they once were.
It is the low costs of passive funds and the huge underperformance of active funds that is driving this sea-change, not a detailed examination of how those high active costs come about.
Rhetorically speaking, if I found an active fund that I was certain would handily (and legally) beat the market – after all fees – for decades to come, it could bill me for strippers and Lamborghinis if it wanted to.
There’s nothing wrong with transparency – except perhaps its potential to confuse customers (which is a line that sounds awfully financial service-speaky, so I won’t push it further today!)
But for me it’s very much a skirmish on the sidelines in the wider war.
Reasonable minds can disagree, though.
My co-blogger I suspect thinks very differently. (He’s away at the moment so I can’t ask him). Robin Powell of the aforementioned Evidence-Based Investor does for sure.
In fact, Robin has even joined something called the Transparency Task Force. When it comes to its broader stated aim of exposing or publicizing the excess costs inherent in so much of the financial system, I can only wish it well.
was a slog…)
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in that respect.)