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

by Robert St George on Oct 02, 2013 at 11:58

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.

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