Skip to the content

Orbis: The funds industry is still letting you down on fees

07 May 2015

Orbis’ Dan Brocklebank explains why it’s so difficult being a retail investor and why the industry should shake up how it charges for funds.

By Lauren Mason,

Reporter, FE Trustnet

The active fund management industry’s standard charging model is not fair to the end investor, according to Orbis’ Dan Brocklebank (pictured), who argues that better fee structures are needed to align managers’ interests with investors.

Fund fees are one of the major drivers of the overall returns achieved by the end investor and are closely watched by all. Although fees have fallen over recent years, many believe that the fund management industry charges too much and often under-delivers.

In his recent investment update, Janus Capital’s Bill Gross said: “Active asset managers conveniently forget that their (my) industry has failed to reduce fees as a percentage of assets which have multiplied by at least a factor of 20 since 1981.”

“They believe therefore, that they and their industry deserve to be 20 times richer because of their skill or, better yet, their introduction of confusing and sometimes destructive quantitative technologies and derivatives that led to Lehman and the great recession.”

Although Gross is speaking about the US mutual funds industry, there are many on this side of the pond who believe fees are too high and better charging models are needed.

Brocklebank, a fund manager and equity analyst at Orbis Investments, believes that active managers’ inability to outperform in all conditions means investors should not be charged when they are falling behind the market.

He told FE Trustnet earlier this year that performance fees are often shunned due to the old ‘2 and 20’ model leaving many investors feeling duped, but says this structure should not be ruled out entirely.

“I would say, on average, the industry is not doing a good job. You can see that in all the statistics because you can just look at how the average fund compares to its benchmark and it’s behind, particularly over any meaningful period of time,” he said.

“A lot of people ask: ‘How can the stock market make a mistake? There are so many clever people out there and they’re all paid really well.’ People are pushing back to the fact that markets are efficient and most of the time that’s true. But there are times when you can clearly see that the market has made a mistake.”

Fund groups typically levy an annual management charge (AMC) on their funds, which essentially pays them to manage the portfolio. The AMC is fixed as a percentage of assets and is charged regardless of the fund’s performance.

However, the Orbis Access’ funds have a fee structure based on performance, where investors are only charged when a fund’s returns exceed those of its benchmark. A similar structure is being used on the recently launched Woodford Patient Capital Trust.

Brocklebank believes this performance fee acts as a good incentive for fund managers to perform to the best of their abilities and work in the interest of the end investor.

“We think the biggest thing you can do is align fee structures with the experience that the investor has – that’s the fairest thing,” he continued.

“If the fund manager does well they should get paid. If the fund doesn’t do well it shouldn’t exist. Our philosophy is, if we can’t add value for our clients the firm will die, as it should. It’s very simple.”

He believes that the performance fee can be a signalling method for the retail investor as to how driven the manager is to perform well and that these indicators are more vital than ever as the industry continues to become more and more crowded with products that look much the same.

He argues that the cause of this over-crowding is the average fund manager’s push to maximise business profit. Because many fund’s fees are charged on a fixed level, Brocklebank believes that managers gather more assets and create more funds as a way of making money.

“What happens is that the individual investor is bombarded with choice and people are bamboozled. People say: ‘Why are you trying to enter this crowded market?’ It may be crowded, but most people haven’t got any savings because it’s complex and they’re baffled by the choice,” he said.

“I think this traditional fee structure will end up with investors having more funds to choose between and they’re not particularly well-equipped to do it. For most people who want to learn about investing, it’s a bit like a blindfolded person feeling an elephant. It’s very hard to understand the totality and the enormity you have in front of you.”

The manager adds that Orbis’ use of performance fees is another way that the firm aims to make investing more clear-cut and therefore more accessible.

Rather than forcing investors to pay for an under-performing fund, investors simply don’t have to pay any fees until the fund outperforms its benchmark.

“If [retail investors] find someone that is willing to do that, what does that say about [the fund management team]? What it says is that they’re prepared to put their reputation on the line, they’re willing to eat their own cooking, and they’ve structured their firm around performance rather than just selling a product.”

“We don’t expect everyone to do this in the industry but, as a retail investor, I would look at the fee structure as a sign that the fund manager is prepared to think differently and that they have a clear alignment of interest.”

FE Trustnet will be returning to issue of fees in coming articles. But how do you feel about them – do you think your funds are worth the fees you’re paying or is the industry still charging its investors too much?

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.