Fund managers rebel against lower fees

published 16 October 2015

764-Godfrey-634 — Daniel Godfrey: sparked a spat that matters

Daniel Godfrey, chief executive of the Investment Association the trade body for fund managers has been ousted from his post after various members (most publicly, M&G and Schroders) threatened to walk out. Your immediate reaction to what looks like a tedious industry spat might be: so what? But this matters. Yet again, it makes it pretty clear as if we needed reminding exactly whose interests the custodians of vast sums of our long-term savings (about £5.5trn to be precise) care most about serving. Here's a clue: not yours or mine.

What did Godfrey do to rile his members so badly? To cut a long story short, he suggested that it might be a good idea to put customers first. He was pushing for greater transparency on fees and charges and, as the Financial Times reports, a "statement of principles" in which "asset managers were asked to promise to put clients' interests first". Yet as Claer Barrett notes in the FT, "only 25 members less than one-eighth of its membership" were willing to sign.

There have been plenty of comments in the trade press to the effect that "it'smore complicated than that" Godfrey wasn't a regulator, he was head of a trade body; he didn't consult enough with members. But the industry can make all the excuses it wants. It's just another reminder that the process of driving down costs and improving transparency will be resisted every step of the way by fund managers. Which is why we'll continue to reiterate the key points to consider before you invest in an actively managed fund.

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Most active managers fail to beat the market over a prolonged period of time, despite being paid handsomely to do so. As a result, many simply "hug" their underlying benchmark in other words, they get as close as they can to copying the underlying index without actually being a tracker fund. So if you're going to pay up for active management, be sure that your manager is active look for concentrated portfolios (where the manager makes significant bets on a relatively small number of stocks). There's no guarantee they will outperform, but at least a high-conviction manager is doing what they're paid to do.

And if you can't invest the time and energy in hunting for a suitable active fund (or you don't want to risk it underperforming), then buy a passive fund that simply tracks the underlying index. They're simple and much cheaper than active funds, which makes a huge difference to your investment pot over the long run.

Marina has a PhD in globalisation and the media from the London School of Economics, where she worked as a teaching assistant on the MSc Global Media. In 2014 she was invited to be a visiting scholar at Columbia University's sociology department in New York.

She has written for the Economists’ Intelligent Life magazine, the Financial Times, the Times Literary Supplement, and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany. She is trilingual and lives in London. She writes features and is the markets editor at MoneyWeek..