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Star managers at bargain prices: What could be better?

11 February 2015

In the first of a series of articles, FE Trustnet looks at the importance of cost when building an investment portfolio.

By Joshua Ausden,

Editor, FE Trustnet

If I asked who the five best fund managers in the UK are, one expert could give a completely different set of answers to another.

I would suspect, however, that Neil Woodford, Nick Train, Giles Hargreave and Ian Spreadbury wouldn’t be far off most people’s lists. If you’re a lover of investment trusts, I’d imagine James Anderson would be knocking on the door as well.

In most walks of life you tend to get what you pay for and fund management is no different… or is it? While some firms claim their intense research capabilities warrant above average charges, the five managers mentioned above are all among the cheapest in their respective asset classes.

FE Alpha Manager Neil Woodford (pictured) is a good example. His £4.8bn CF Woodford Equity Income fund has a fixed ongoing charges figure (OCF) of just 0.75 per cent and it can be bought for as cheap as 0.6 per cent on some platforms.

High conviction large-cap stockpicker Nick Train is another. His CF Lindsell Train UK Equity fund – the most consistent in the IA UK All Companies sector – has an OCF of 0.77 per cent. Many of his lesser peers charge well over 1 per cent.

  

Source: FE Analytics

Hargreave is the antithesis of Train, running a highly diversified portfolio of over 300 small cap companies in his sector-leading Marlborough UK Micro Cap Growth fund. He’s still managed to keep his costs down to 0.8 per cent, falling to as little as 0.75 per cent on certain platforms.

Fidelity MoneyBuilder Income, headed up by Spreadbury, is a no nonsense investment-grade bond fund that has proven particularly popular for investors in retirement since its launch 20 years ago.

The £3.2bn fund has an OCF of less than 0.5 per cent on some platforms, making it even cheaper than Anderson’s top-performing Scottish Mortgage Investment Trust, which charges exactly 0.5 per cent.


Performance of funds and benchmarks over 10yrs



Source: FE Analytics

So why is it that these funds that are understandably in high demand are cheaper than the vast majority of their peers? Rob Gleeson, head of FE Research, says there are a few reasons.

“The best fund managers tend to attract the most in assets, which gives them economies of scale and allows them to cut costs,” said Gleeson.

“This isn’t the case across all fund houses, as some don’t pass on the efficiency of their model to their clients, but some of the very best managers out there have done it.”

Gleeson says it takes a certain type of manager and company to actively bring down costs as assets increase.

“The decision to put your clients first really comes down to mindset. If you’re a manager who doesn’t take on unnecessary risks and is a champion of transferring capital back to your clients, you’re more likely to be active in this area,” he said.

Performance of managers and peer group since 2000



Source: FE Analytics

“Look at Woodford: the type of company he looks for are those that create value for their shareholders and that seems to have translated into the way he runs a business. Not all practice what they preach, though.”

Gleeson says the structure of the company does play a big part. Specialist boutiques runs by the likes of Woodford, Hargreave and Train have much tighter operations than listed firms with a global reach and therefore have a lower cost base.

This, he says, goes a long way in explaining why Woodford can charge 0.75 per cent, even though Invesco Perpetual High Income – his previous venture – charges 0.92 per cent.


“Woodford knows exactly how many people he needs to run his funds, but at Invesco Perpetual the cost base is automatically higher because it’s a much larger business,” he said.

Gleeson (pictured) adds that managers who have a naturally low turnover such as Train, Woodford and Anderson are able to keep trading costs to a minimum, thus helping to keep overall costs lower.

He warns there is one possible stumbling block that investors in cheap top-performing funds need to keep an eye on, but overall he says the pros far outweigh the cons.

“Sometimes you can get into a bit of a self-fulfilling cycle. Top-performers are able to justify lower costs and the money just keeps flooding in. This can lead to problems with capacity, but you’d hope the groups are on top of it.” 

This is certainly not a risk for Anderson’s £3bn Scottish Mortgage Trust, which is closed-ended and therefore by definition cannot receive inflows. Spreadbury’s tendency to invest in highly liquid and high quality bonds should mean that he could run significantly more than the £3.2bn he does currently.

In spite of Train’s status as one of the best UK stockpickers, he keeps a much lower profile than many of his peers and his £1.4bn UK Equity fund is unlikely to become an industry leader in terms of assets.

Woodford has himself proven that he can run more than £30bn in UK equities, though investors looking for significant exposure to small and mid-caps should probably look elsewhere; perhaps his soon-to-be-launched Woodford Patient Capital Trust

Perhaps the biggest question mark here is over Hargreave’s £444m fund. The manager has admitted his £878m Marlborough Special Sits portfolio has started to invest more in mid-caps as a result of inflows, but existing investors will be hoping he maintains his micro-cap focus on UK Micro Cap Growth. 


In the next article in the series, FE Trustnet will highlight a selection of giant funds and discuss whether they can justify charging above average fees.

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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.