Earlier this month, fund manager Winton Capital Management cut the fees it charges to manage its Winton Global Alpha Fund. It is the latest in a growing list of managers to cut fees over the past 12 months and every indication is that the trend will continue. This is good news for investors looking for a better deal.
Traditional active fund managers are under attack on a couple of fronts. The market for low-cost exchange traded funds (ETFs), which are predominantly passive funds, is booming and taking money away from the traditional managers.
Strong funds flows boosted the local ETF sector by 14 per cent in the first half of the year, according to data released by BetaShares last week. ETFs listed on the Australian Securities Exchange have a total of $29.4 billion in funds under management and have grown at a compound annual growth rate of 30 per cent since emerging in the local market in the early 2000s
The other problem for traditional managers is that there is growing evidence that active fund managers struggle to produce returns that are above market benchmarks consistently. It is getting harder for them to justify their fees.
According to a recent Morningstar report, local actively managed global equity funds underperformed index fund returns in 2016 – the fourth year in a row and the sixth year out of the last 10 that active has been beaten by passive in the global equity segment.
Along with Winton Capital, K2 Asset Management, Platinum Asset Management, Pengana Capital Group, T Rowe Price have cut fees in recent months.
With effect from July 1, Winton cut the management fee for the $1.9 billion Winton Global Alpha Fund from 1.88 per cent to 1.78 per cent and cut its performance fee from 20.5 per cent to 16.4 per cent.
In a note to clients on the changes, Morningstar says: “Winton remains relatively expensive from a headline fee perspective within our universe, even after the cut. However, we believe this is a very positive development for investors in the fund.”
K2 Asset Management announced cuts to three of its funds, effective from July 3:
- The management fee of the K2 Australian Fund falls from 1.54 per cent to 1.31 per cent and its performance fee falls from 20.5 per cent to 15.38 per cent.
- The management fee of the K2 Select International Fund falls from 1.54 per cent to 1.36 per cent and its performance fee falls from 20.5 per cent to 15.38 per cent.
- The management fee of the Australian Small Cap Fund falls from 2.05 per cent to 1.31 per cent and its performance fee falls from 20.5 per cent to 15.38 per cent.
Campbell Neal, K2’s managing director, says the changes followed consultation with industry and clients.
“These changes will better place K2 to be more competitive in a number of new distribution channels, with the aim to grow funds under management,” Neal says.
Platinum Asset Management announced cuts to the management fees of its Platinum Trust Funds and the Platinum Global Fund, also effective from July. Platinum will offer investors a choice of two options:
- A new performance fee option, made up of a management fee of 1.1 per cent and a relative outperformance fee of 15 per cent.
- A standard fee option, with a management fee of 1.35 per cent. This is a reduction from the current fee of 1.5 per cent.
Platinum says revenue will decline by $24 million (a nine per cent fall) in 2017/18, as a result of the fee cuts (assuming no increase in funds flow).
Pengana Capital Group, which has recently taken over Hunter Hall International, announced changes to the management fees of the Hunter Hall Value Growth Trust and the listed investment company, Hunter Hall Global Value Ltd.
- The base fee for Hunter Hall Global Value will be cut from 1.5 per cent to 1.2 per cent. The fund’s performance fee high water mark will be reset.
- The management fee for the Hunter Hall Value Growth Trust is being reduced from 1.64 per cent to 1.35 per cent. This fee will cover all expenses, with no additional reimbursement charges. The fund’s performance fee has been eliminated.
The new fee structure for the Value Growth Trust was introduced on June 6, while changes to Global Value Ltd’s fee structure will be put to shareholders at the company’s next annual general meeting.
Pengana said in a statement to the Australian Securities Exchange that the changes to Global Value’s fees would “align the investment manager with shareholders by paying them the combination of a lower base fee with an increased chance of earning outperformance fees.”
T Rowe Price has cut the management fee for its Australian Equity Fund from 90 basis points to 60 bps (it does not have a performance fee).
Speaking at a conference in Sydney recently, David Wright, the managing partner of researcher Zenith Investment Partners, said there was still a place for active managers that could outperform over time but not for managers that charge active fees and produce index returns.
Wright warned that “closet benchmarking” had no future in the investment management industry. “There are a number of managers charging active fees and delivering benchmark returns. The risk they face is that investors can buy the index very cheaply,” he says.
Wright advises investors that when they are looking for an active manager they look for an “active share” of 50 per cent or more and tracking error of three per cent plus.
Active share is a measure of a portfolio’s deviation from the benchmark – the variation of a stock weighting from its index weighting or the inclusion of a stock that is not in the index.
Wright says it is not easy to construct a truly active Australian equity portfolio. The market is highly concentrated, with the top 20 stocks accounting for about 60 per cent of the ASX 200 market capitalisation.
The fee-cutting trend is not confined to Australia. HSBC Global Asset Management (Canada) has recently announced that it will cut the fees on a range of its funds.
Marc Cevey, the chief executive officer of HSBC Global Asset Management (Canada), was quoted in the report, saying: “In today’s fee-conscious environment, reducing the cost of investing is essential to help clients achieve their financial objectives. These fee reductions reaffirm our commitment to delivering a robust lineup of mutual funds at competitive pricing.”