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The performance premium: How much differentiation could we see in fund pricing?

The performance premium: How much differentiation could we see in fund pricing?

The factors weighing on fund prices are insistent, with the slow demise of trail commission one such gravitational force.

With Standard Life securing ‘super clean’ arrangements with 15 asset management groups – bringing typical charges down to around 0.66% – and Hargreaves Lansdown foremost among those demanding even lower fees, a floor has yet to be reached.

Brooks Macdonald chief executive Chris Macdonald (pictured) believes fund prices could fall a further 10% from the current levels, saying: ‘I would be surprised if funds are not at least 10% cheaper than where they are now in six months.’

But where do others in the industry see charges headed?

Mike Webb, chief executive of Rathbone Unit Trust Management, said: ‘The regulatory environment is driving transparency. How are all the mouths in the chain fed? And transparency tends to drive down prices. That process has already started to occur and I don’t think it’s finished yet.’

A second, and related, element is the burgeoning demand for ETFs and other trackers.

‘The rise of low-cost passive funds adds pressure on fund houses to close sub-optimal funds or cut fees,’ says Andrew Birt, associate director for investments at Saunderson House.

‘The problem with pricing is being exacerbated by the interest in passive strategies,’ agrees Webb. ‘Those managers who purport to be active but are really benchmark-driven will struggle.’

Sadly, such money runners are not in the minority. ‘There are a large number of mediocre funds in the market,’ Birt observes.

Put together, these trends are driving many asset managers to prize volume over margin, offering preferential deals to the giant distributors and hoping the pricing arithmetic works out.

A few, however, are tacking the other way. AXA Framlington has set the annual management charge for clean shares on its £4.3 billion UK Select Opportunities fund, managed by Nigel Thomas, at 0.85%. This bucks the vogue for 0.75% but has not had a discernible impact on flows into the fund, which is widely held and top quartile over three years.

Many fund groups also argue that for top performing funds, investors should expect to pay a premium price.

‘If you want long-term alpha, that comes at a price,’ says Webb. But he laments that ‘price rather than value for money has become the issue’.

Birt concurs: ‘The best managers should be able to justify higher fees. However, this pricing power is the exception rather than the rule.’

A tangential way to send the same message is to soft-close a fund. This conveys that the product is in great demand – while limiting supply – and that the manager is sensitive to the interests of existing investors.

‘Managers who are willing to capacity constrain are better placed to resist and protect margins,’ says Webb.

‘Managers are being more active at soft closing successful funds,’ Birt notes. ‘This is probably intended to give them more flexibility on charging when flows are strong, rather than to attach a premium price to a top fund. However, premium pricing may emerge over time, particularly if the assets in soft-closed funds prove to be sticky.’

For now the pricing wars are being fought at the platform level by distributors, not at the fund level by managers.

Many groups, having already undertaken significant work to introduce clean share classes, are in no rush to cut charges further straight away through so-called ‘super-clean share classes’.

According to Scott Goodsir, managing director of UK wholesale at BNY Mellon: ‘We will continue to monitor the market, but we have just launched clean shares and we need to let the market settle. We can then make a more sensible decision on this in 2014.

‘There are pricing pressures all around the value chain and as a business we continue to monitor our pricing, but we won’t be launching super-clean share classes today.’

However, the pricing pressures are here to stay and the likes of the Standard Life deal will continue to chip away at fund charges. The Standard Life terms are equivalent to a 12% discount.

Over the months ahead, the ongoing pressure may prompt a few brave managers to seek differentiation through a premium price.

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