The fund management industry isn’t that keen on Alan Miller. Nor on his wife Gina, for that matter. Everyone I ask about the Millers says that they aren’t “quite sure” about what they’re up to. And you can sort of see why. Miller, you see, is the classic poacher turned gamekeeper.
He has made a fortune in the traditional fund management business, first at Gartmore and Jupiter and finally at New Star, where he was chief investment officer and a stock-selecting hedge fund manager. How much money did he make?
If you really want to know the details, you can just Google “Alan Miller, divorce” and you’ll learn about the £5m he was forced to hand over to his ex-wife after just three years of marriage (I can’t tell you more about this as I considered it below the dignity of the magazine to ask – sorry) and about how he made £30m at New Star alone.
However, now, money banked, he is working to destroy the system that made him rich. Along with his (new) wife, Gina, he has launched not only a new private client money management business (SCM Private) but also a high profile and aggressive campaign (True and Fair – see www.scmprivate.com for more) against the high costs of fund management.
I asked him why, given his successes in the past, he is doing this. After all, if you’ve finished googling, you will now know that money isn’t an issue. It turns out that Gina (who has a history of starting businesses) pushed him into it in the first place.
The problem with being an entrepreneur, she says, is “that you never stop”. But he didn’t mind being pushed. Why? Because for the first time “there is a real kind of passion in it” for him. He is, he says, doing something he “genuinely believes in”.
There is something of the porn baron turned born-again Christian in this. I wonder how it could be that in all the years he was working to make his millions at the top end of the fund management industry, it never occurred to him that he might be working inside a corrupt system.
It did. But, as he says, sometimes you have to “stand back” to see just how bad something is. He just wasn’t aware of the extent of the loopholes and venal practises across the industry. He didn’t know, for example, that fund managers routinely take a cut of any interest on their clients’ cash; that they take a commission on currency exchanges when they buy foreign stocks for clients; or that they make a large part of their margins not out of management fees, but from broking commissions.
No cash, it seems, can pass a money management business in any shape or form without shrinking a little on the way. Fund managers have “basically been allowed to lose sight of the fact that it is not their money”.
The result? Look at the perverse incentives all this creates (the more you deal, for example, the more you make as a manager), and it is a miracle there is any wealth left for the industry to manage away. On top of that, Miller was, he says, amazed to find that there is no common system for comparing fund costs.
There is the total expense ratio (TER – the one most people use for funds). But to Miller the TER is “complete and utter nonsense”. It doesn’t include some of the costs of running funds (such as dealing fees), but while it is bad in the fund management business, it is even worse for private clients, who “can’t possibly work out” what it costs them to pay someone else to invest their money for them.
What is the RDR?
The retail distribution review (RDR) is a regulatory reform of the way in which private investors pay for and receive financial advice. Up until now, many independent financial advisers (IFAs) have offered financial advice ‘free’ upfront, and made their money by receiving commission from the funds that they sell – which, of course, comes out of customers’ returns.
Clearly, this opaque system ran the risk of creating warped incentives whereby IFAs would recommend the fund that would pay them the most commission, as opposed to being most suitable for their clients’ needs.
So from 2013, commission payments are being banned. IFAs will instead charge customers a fee for their services in much the same way as a lawyer, or other professional, would. The hope is that fund management groups will no longer compete to offer the best commission, but will instead compete on costs, driving down prices for investors. RDR will also mean that IFAs have to be better qualified than they once were.
Their own way of doing it is different. Anyone with £250,000 can sign up for one of their three portfolios and pay management fees of 0.5% to 0.75% (plus VAT, which brings it to 0.6% and 0.9%). There are also no initial charges, no performance fees, and no hidden fees – the only extras are the underlying costs of the exchange-traded funds (ETFs) in each portfolio and the cost of dealing (this brings the final total costs up to around 1% for the Bond Reserve portfolio and 1.4% for the Long Term Return portfolio and 1.5% for the Absolute Return portfolio – more on these below).
All clients can also go online at any time to look at their portfolios – which are updated daily. All this, say the Millers, is designed to “make sense for our own money”, a large amount of which is kept in the business (“we have seven-figure sums in each of the portfolios”).
I don’t think you can really argue with the Miller True and Fair campaign (although this is, sadly, not a view shared across the industry). It tells the truth about costs in a famously opaque industry and in doing so has added hugely to a debate that will eventually bring down costs for everyone. Admirable stuff.
I’m also impressed with the transparent fee structure of their own business. However, I do wonder just how long it will be as unique an offering as it looks now.
Surely the fact that, thanks to the retail distribution review (RDR – see below), from now on all commission paid to independent financial advisers (IFAs) is to be banned and that all charges have to be totally transparent, will mean that the expenses problem will start to solve itself?
After all, there has been a battle on fees in the pensions industry as auto enrolment kicks off and it is accepted throughout most of the industry that the good old days of harvesting free money from unsuspecting individuals and institutions are all but gone.
Performance fees (for which there is rarely an excuse) are being charged less frequently by fund managers, and low-price passive funds are challenging the costs of active funds across the market (the likes of Vanguard charge as little as 0.2% a year for their ETFs).
At the same time the big fund managers have mostly announced new “RDR-ready” share classes, which put management fees well under 1%. I’d say things are going well – assuming you think that falling fund management costs are a good thing.
Alan isn’t so sure. There is, he says, a problem with making it all about cost. Oh? It turns out that the RDR is, says Miller, simply shifting adviser emphasis from which products pay the highest commission to which products are the cheapest all round – the cheaper a product, the more they feel they can charge in advice fees. RDR is simply producing a new problem under which a good number of investors will end up with products that are only cheap because they are awful. The right funds have to be cheap and good.
OK. So how good is his offering? His clients are offered three portfolios – Long Term Return, Absolute Return and Bond Reserve. It is too early to say whether they are going to be long-term winners or not (they were only launched in June 2009), but so far the results are good.
The first has returned 37% since inception, the second 30% and the third 11.5%. Their benchmarks have returned 32%, 11.7%, and 3.7% respectively. How these returns are achieved isn’t something that is much discussed in interviews (the campaigns are the Miller’s PR hook) but the strategy is a big part of the low-cost point.
There is no stock picking (despite this being Miller’s old expertise). Instead the funds are all invested in passive vehicles (mostly ETFs) and the returns (be they good or bad) come from asset allocation, something that makes complete sense given that endless studies have shown that it is this that makes the difference to most portfolios.
How does the allocation work? It is weighted towards markets that offer value. Where is the value now? “There’s a lot of value in emerging markets”; there is “definitely value in China”, the yields on blue chip equities at 4%-5% offer reasonable medium-term value; and Japan looks much better than it did two years ago.
And no value? The bond fund holds very little in the way of western sovereign bonds. Gilts just “aren’t worth it” when you compare them to emerging markets sovereign bonds (which make up around 20% of the portfolio). There is only so much money that can flee to a so-called safe haven, says Miller, before it becomes so expensive that it becomes the “most dangerous investment” there is. I can’t see much to argue with there either.
Who are Alan and Gina Miller
Alan Miller had a long career as a fund manager – he was senior fund manager at Gartmore Investment Management between 1988 and 1994. But he rose to prominence after he joined Jupiter Asset Management in 1994, and went on to launch one of the first UK equity long/short hedge funds for Jupiter Asset Management in 1997.
When Jupiter colleague John Duffield jumped ship to start a new management company, Miller went with him and became a founding shareholder and chief investment officer of New Star Asset Management from early 2001. He left New Star in early 2007, and in 2009 teamed up with his second wife, Gina – a former New Star marketing consultant – to found SCM Private, where he is the chief investment officer.
He is also the non-executive director of a number of private companies including Pharminox – a pharmaceutical company specialising in cancer research which was spun out of Oxford University – and Tissue Regenix, a tissue regeneration specialist spun out of Leeds University.
Before working with Alan, Gina had carved out a successful career in events and marketing with BMW and Legal & General. She also started, and later sold, her own financial services marketing agency, SWAY Marketing. SCM – of which she is the chief executive – is the seventh business she has either founded or co-founded.