IFAs warn providers: Don’t let low cost funds be next Absolute Return

Advisers are warning low-cost actively managed funds could disappoint investors in the same way as many flavour of the month absolute return portfolios.

Fund experts are predicting other managers will quickly follow groups like JPMAM and Schroders and launch low-cost active funds to challenge the rise of passive vehicles like ETFs and prepare for RDR pricing changes.

However, advisers fear many of these ‘me-too’ launches could mis-fire in the longer term. They even liken them to funds in the absolute return sector which launched to much fanfare in 2008 but often failed to do what they said on the tin.

Ben Seager-Scott, senior analyst at Whitechurch Securities, said: “I am confident the likes of Schroders and JPMAM can carry this approach off, and it will be good for investors.

“My only concern is that these funds could begin to dominate headlines for all the wrong reasons in years to come. Similar to the plight of absolute return funds, there could be a backlash against these vehicles if other, less successful investment houses adopt the approach and do not perform well or live up to expectations.”

Mark Waters, investment manager at Skerritt Consultants, welcomes the challenge to traditional fund charging structures for retail investors but questions what message this is sending out to investors.

“Companies the size of Schroders and JPMAM are probably well placed to offer these funds, but what does it say about their other actively managed funds and the high charges there? Are they saying investors should expect better performance because of the charges or because of the way it is managed?

“If they work, great. You would be mad not to use them as part of a portfolio if they are proven to be as good as the more expensive option. How long they will take to prove themselves is a difficult question. It depends how they cope with change because change can happen very quickly.

“For example, are you going to get the same attention on the management side in the event of another 2008, or is it more a passive type vehicle, in that you have low charges but you take the consequences of not being quite as active?”

Caroline Hawkesley, director at Evolve Financial Planning which utilises passive investment strategies, believes monitoring the longer-term performance of these funds will be crucial.

“We have always followed a passive investment strategy because we find actively managed funds do not consistently outperform. When you tie that in with the fact they are typically at a higher cost, all that is doing is eating into the return for the client.

“Bringing an active strategy to the market with a cost comparative to an index fund does change this situation slightly. However, I do not think it would necessarily make them more appealing to us: our view would still be how consistent any outperformance is. We believe the stock markets are efficient.

“It is not just about the cost – it would be about how actively the funds are managed and what they are trying to achieve.”

Schroders’ UK Core fund, the first in its suite of low-cost actively managed products, launches this week. It will be managed by Sue Noffke, Andy Simpson and Jessica Ground, who form Schroders’ UK Prime team, which runs £4.7bn of assets within Richard Buxton’s overall UK equity team.

With a total expense ratio capped at 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.

Schroders has also added a retail share class to its QEP Global Core fund to create the second offering in the suite.

The portfolio's total expense ratio is capped at 40 basis points and aims to outperform the MSCI World or equivalent index by 1% per annum, gross of expenses.

The Schroders offering follows the launch of JPMAM’s UK Active Index Plus fund at the beginning of the year with an alpha target of 1%. It has an AMC of 0.25% and fixed expenses of 0.15%. There is a 10% performance fee but this is capped so the TER never rises above 0.55%.

For OBSR's Richard Romer-Lee's view on low-cost actively managed funds click here.