ig City funds are eating up 20% of the returns earned by small investors and face extinction unless they reform, analysis for the Evening Standard suggests.
Dubbed “investment dinosaurs” some of the oldest and grandest names in the City risk losing customers to cheaper funds which track the stock market or to the new breed of retail investor confident to pick their own shares.
SCM Direct measured the performance over the past five years of £653 billion worth of funds managed by Abrdn, Schroders, Quilters, M&G, Jupiter, Liontrust, Rathbones, iShares and Vanguard.
The results do not make pretty reading for the fund giants, many of whom have been stalwarts of the City for decades. Abrdn traces its history back to 1825 and manages £875 billion on behalf of pension funds and small investors in ISAs.
Abrdn’s charges as a percentage of investments underlying returns over the last five years are a staggering 31%. Vanguard, the cheap US tracker giant, charges 2%.
The funds analysed have taken nearly £15 billion in fees in the past five years.
Alan Miller of SCM Direct said: “The UK’s investment dinosaurs are in a mess, they have grown very fat over many years feasting on more clients but they now face a dire future.”
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With interest rates rising it is now increasingly possible to make returns that outstrip the traditional funds in simple bank savings accounts that charge basically nothing.
In September Nationwide Building Society launched an account that pays interest of 8%. Though not available to everyone, it is a sign of the competition for savers money that may attract people away from pricey stock market funds.
Miller added: “Abrdn seems to have the biggest strategic issue as its average investor across the funds analysed would have made just 1.5% per annum over the last five years and seen nearly a third of their underlying returns eaten up by ABRDN’s charges.”
The days of the star fund manager could be over. Miller says: “There is no great extra return by paying more fees to some hotshot as the markets are more efficient than in the past — everyone be they private or institutional gets the same information at the same time making it impossible in most markets to have some long-lasting edge.”
Abrdn said in response: “We are long-term investors committed to delivering value and risk-adjusted returns in line with the interests of our clients. We are always striving to improve performance as demonstrated by our three year returns in areas such as fixed income, Emerging Market equities and alternatives where our above benchmark performance is between 78% and 100%.”
M&G said: “Active asset management can generate value over the long-term and our clients assess value by a range of factors, including performance and fees. As companies deal with high interest rates, weak demand, and relentless innovation, there will continue to be winners and losers.”
Analysis by broker Peel Hunt suggests the gap between good funds that offer value and bad ones will widen from here. That is because the Financial Conduct Authority will introduce tougher rules for funds on reporting their own performance.
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St James Place has admitted that 10% of its own funds are poor value.
Peel Hunt said: “So far, the general conclusion is that most funds offer value, with SJP being relatively unusual in highlighting 10% of funds that ‘delivered insufficient value’. We think that over time the FCA will inevitably expect more rigour and differentiation, which could impact future flows and widen the gap between good and bad.”