Active evolution

Maria Merricks investigates the introduction of low-cost actively managed funds.

The active versus passive debate is long standing with arguments in favour of both sides well established.

Actively managed will provide investors with a skilled fund manager at the helm, while passively managed is offered at a lower price.

Index trackers have, up until recently, dominated the low cost market and advisers and consumers have been left to choose between the two investment styles.

However, new product offerings from J.P. Morgan Asset Management and Schroders aim to provide investors with the best of both worlds: an actively managed fund at a low price.

JPMAM believes this is a winning formula as it found the majority of investors bought a passive fund for its low cost as opposed to believing in its strategy.

Robin Stoakley, managing director of UK intermediary at Schroders, is not a fan of index trackers.

He says allocating capital purely on the basis of size rather than the fundamental quality of a company is an approach that can be improved upon. Taking charges into account, they are designed to underperform, he says.

Discipline

“We have decided to launch a fundamentally actively managed fund, but run in a very disciplined way with an objective of offering 100 basis points outperformance per year after fees.

“If you can deliver that year in year out, you end up with some very comfortable outperformance of the index relative to a tracker.”

The first in a suite of low cost actively managed products from the group, Schroders’ UK Core fund, is set to launch this week.

The vehicle will be managed by Sue Noffke, Andy Simpson and Jessica Ground, who form Schroders’ UK Prime team. UK Prime runs £4.7bn of assets within Richard Buxton’s UK equity team.

“The team has run insurance and institutional clients’ money for many years. They have a proven track record in active management and outperformance against the benchmark index without taking too much risk. This is exactly the approach we want for UK Core,” says Stoakley.

With a total expense ratio of 40 basis points, the vehicle aims to generate outperformance after fees of 1% per annum versus the FTSE All Share. The annual management charge is 0.35%, with no initial charge, performance fees or exit charges.

The Schroders offering follows the launch of JPMAM’s UK Active Index Plus fund at the beginning of the year.

Mike Parsons, head of IFA sales at JPMAM, says it is no coincidence the two investment houses have introduced the idea around the same time. The Schroders launch confirms there is space in the market for these funds, he says.

Strategy

“Our fund uses the exact same strategy as many of the funds our clients will be familiar with. What we do have in this fund is more risk control, in the sense the bets are smaller. Each of the positions are smaller, hence the alpha target is lower,” says Parsons.

While the majority of the group’s funds have a target of 2% to 3% alpha, the UK Active Index Plus fund has a target of 1%.

It has an AMC of 25 basis points and fixed expenses of 15 bps. There is a 10% performance fee so, if the team – led by Michael Barakos – outperforms the index by 1% the investor will pay 10 basis points.

Parsons says: “The beauty of this product is we only collect the performance fee if we actually deliver performance above the index.”

So, what is the motivation behind these low cost fund launches?

The RDR, according to Peter Robertson, head of retail investment at Vanguard. He says TERs are set to reduce as a result of the regulatory change.

Competition

Currently, the average TER in the UK is 165 basis points. When commission of around 50 basis points is taken off, this will reduce. Some may even remove a platform fee of 25 basis points meaning the average will come to the 90s, he says.

“There has never really been price competition in the UK market, but everybody has to change their price between now and 2013,” says Robertson.

“Some people are making that move early, with the idea they will get better flows by competing on price. They are saying: ‘I can afford to do it for that price and I believe I will get much higher volumes’.”

This also appears to be the Schroders line of thought. Stoakley recognises the changes RDR will bring with it and is sure these factors will increase the use of low cost funds in investment strategies.

Position

“What we wanted to do was position ourselves to be seen as a leading player offering low-cost active alternatives to tracker funds. We expect that part of the market to increasingly grow in terms of demand,” says Stoakley.

JPMAM agrees. Parsons says the group will continue to maintain a wide spectrum of funds with higher alpha target and higher fees, but recognise room for managers to offer competitively priced, actively managed funds in a part of the market where price is important.

Pricing

“We are seeing a lot of advisers becoming more price conscious and we want to compete in that space,” he says.

As the landscape continues to change in the run up to 2013, Robertson is confident similar products will transpire as other investment houses take on the approach.
He says: “There will be plenty of people taking great interest in the reaction to the Schroders and J.P. Morgan funds, eventually following the lead.

“This is great news for UK consumers and advisers because it will mean a range of lower cost funds to choose from.”