M&G's Willcocks: End consumers will pay more post-RDR

M&G global head of retail sales says industry is awash with mediocrity, which must be eradicated.

As fund groups begin to launch offerings tailored to meet adviser and client needs post-RDR, Katrina Lloyd talks to M&G managing director, global head of retail sales Jonathan Willcocks about his views on low cost funds, charging levels and the post-RDR landscape.

What is M&G’s opinion on low-cost active funds?
I am not a believer in the low-cost options of index plus one funds at all. I think it is a get out clause for managers. Some groups are doing it to ensure they occupy a certain space in the market place post-RDR but I think it is a flawed business decision.

We fundamentally believe in our ability to generate alpha and our whole business is set up to do this. Why would I constrain our fund managers when I think they can generate index plus 2%,3%,4% or higher depending on their strategy?

These groups are assuming they can generate index plus one but presumably this is in a smoothed environment as the entry point of every client is different. To generate index plus one you have to take risk and you have the ability to outperform but what if there is tremendous performance in the first month and you have reached index plus one already?

The first investors who bought it are happy but what about the people at the end of the run? I think the index plus one aim will be quite difficult to achieve in a smoothed way for each client.

In the institutional environment it didn’t matter as one mandate was given to the manager with no withdrawals and very few additions and it was a defined benefit lump sum investment. Here there will be constant flows in and out.

Also, what happens if by taking risk you make a mistake, then index plus one funds will start to underperform the benchmark. I do not believe investors’ expectations will be matched by reality.

Why would you want these funds as an investor?

If advisers are worried about RDR and trying to cap the overall charges within a certain boundary there could be a driver to use low cost funds to get the overall TER down.

The choice is you could pick up a low cost active fund trying to generate index plus one and pay 45 basis points (bps) AMC but you only get index plus one if all goes well.

Or, you could put half a portfolio into a tracker at 30bps and the other half in 75bps funds which have a sustained track record of delivering alpha.

You would only need the active part to deliver index plus two or more and you are better off than being stuck in index plus one.

You would have the upside and a bit more downside buying an active fund but I think your risk reward balance is skewed to the upside if you pick the right fund manager.

As a businessman, if I believe in my ability to deliver alpha I would rather stick to that. If you start charging 45bps for index plus one and it works, what about other funds with index minus returns that are not performing?

This is a challenge to groups’ incumbent business models they haven’t thought through. As a result, I think single strategy low cost equity funds are a flawed concept.

What about lower-cost multi-asset funds?

These are a lot more interesting in my opinion but why charge 45bps for them in the retail space as there is no benchmark or index plus one target?

These kind of multi-asset funds came  from the institutional desks and if you look at the structures, charging 45bp from a manufacturing perspective is eminently sensible.

However, what about the messaging, roadshows and communication costs needed to deliver these funds to the retail market?

A multi-asset proposition often makes up a far more significant part of a client’s portfolio and your engagement with them needs to be different.

The jury will remain out over the next three years on these kind of funds. In the multi-asset space I think some of these propositions are very credible and have come from a strong institutional base.

I will be interested to see how they perform but when it comes to charges I don’t want to rob one product to pay another.