The top-performing Majedie UK Focus fund has a management charge double the fees of the firm’s other UK equity fund and looks high compared to its peers, so what are the reasons behind this big difference in price?
There’s been an increased focus on costs within the fund management industry over recent years, with regulators using initiatives such as the retail distribution review (RDR) to make it more clear to investors exactly what they paying for when buying a fund.
When RDR came into force, an annual management charge (AMC) of 0.75 per cent quickly became seen as the default fee for a UK equity fund – although many groups have since brought it down even further.
However, one of our readers recently got in touch to find out why the AMC on Majedie UK Focus’ X Acc share class is 1.50 per cent while for the same share class of Majedie UK Equity it amounts to just 0.75 per cent.
Source: FE Analytics
The £583m Majedie UK Focus fund is managed by Chris Field, James de Uphaugh, Matthew Smith and Chris Reid, while the £3.2bn Majedie UK Equity fund is headed up by Field, de Uphaugh, Smith, Adam Parker and Richard Staveley.
Both are in the IA UK All Companies sector and are benchmarked against the FTSE All Share.
When we asked Majedie about their fees, the firm said: “The former is effectively a distilled version of the latter: it contains the best ideas of each of its four fund managers.”
“Capacity in the UK Focus strategy (incorporating the UK Focus fund and segregated mandates managed alongside) was first limited in August 2005, when AUM reached £300m – equivalent to just 10 per cent of the combined capacity of the two strategies at that time (£3bn).”
“It is this scarcity of capacity that justifies the higher AMC; we believe this decision has been borne out in performance. UK Focus positions are typically more concentrated and therefore take up more of the available capacity: executing trades in the equity market can be akin to wading through treacle, certainly for larger asset management firms.”
These higher fees, however, have not hampered the performance of Majedie UK Focus, which has made a first-decile 336.40 per cent since launch in September 2003 against the sector’s 165.18 per cent and the benchmark’s 167.48 per cent.
Performance of funds vs sector and index since launch
Source: FE Analytics
As the graph above shows, Majedie UK Equity has also made a first-decile return over the period in question – just not to the same extent as the more focused fund.
Not all commentators are persuaded by the firm’s argument.
Investment Quorum’s Lee Robertson and Peter Lowman said: “Majedie do have an excellent investment process of picking stocks and we understand the distilling of the ‘best ideas’ into a focused portfolio is an attractive proposition for those clients with additional risk appetite. Investors are being rewarded but they can do better for less with other managers.”
“Given that it’s a concentrated list the question might be asked why would you pay more for this strategy when within the All Companies sector there are fund management groups offering very similar investment approaches at between 0.65 and 0.75 basis points AMC and have delivered better performances over one, three and five years.”
Majedie UK Focus is certainly much more concentrated that UK Equity, with 63 holdings versus 198. UK Focus’ largest position accounts for 5.35 per cent of assets while the smallest is 0.14 per cent; in the more diversified portfolio these weightings are 6.17 and 0.02 per cent respectively.
Gary Potter, the co-head of multi-manager at F&C, agrees with Majedie’s decision to reflect the scarcity of capacity with higher fees. Potter currently holds the fund, having switched out of Majedie UK Equity in its favour, and describes it as “fantastic performer”.
“There seems to be a predominance of focus on fees in this industry and I think that’s wrong,” he said.
“It’s right that fees are assessed, questioned and challenged – but in a case like this, my view is very clear. They are well within their rights to charge a premium price for a premium product and for us Majedie UK Focus has been a fantastic investment.”
“Our standpoint is: price is what you pay and value is what you get. We like to focus on the value. I am at ease with groups charging more for such strong outperformance. I’m totally respectful of companies that want to place a higher charge on those funds that have scarcer capacity.”
While both funds have established a strong record of outperforming both the sector and the benchmark, UK Focus has consistently crept ahead of its peer. The fund has been first quartile in seven of the last 10 full calendar years, second quartile in two and fourth quartile in just one.
UK Equity has only three years of first-quartile numbers, spending six in the second quartile and one in fourth. In 2010 – the year both funds were in the bottom quartile – UK Focus managed to outperform UK Equity, although it did lag the index.
Since launch, the focused fund has tended to be more volatile than Majedie UK Equity, as well as having a slightly higher maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times.
However, Majedie UK Focus still sits in the first decile for both these metrics, as well as alpha generation, maximum gain and Sharpe, Sortino and Treynor ratios – which are all higher then UK Equity’s.
Ultimately, the choice is the individual investor’s as to whether they are willing to pay more for a “premium” product or if they will avoid shelling out for expensive funds on principle.
Performance of funds over 5yrs
Source: FE Analytics
For those in the latter camp, Robertson and Lowman suggest CF Lindsell Train UK Equity and Franklin UK Managers' Focus, which have respective AMCs of 0.77 per cent and 0.75 per cent while building concentrated portfolios.
FE Analytics shows both have outperformed Majedie UK Focus over one, three and five-year time frames, although the Franklin does lag it over the eight years of the last market cycle.
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