22nd April 2022
A few months ago we wrote about our frustrations with how authorised corporate directors (ACDs) are guided by our industry body, the investment association, to calculate ongoing charge figures (OCFs). As a reminder, we are firm believers in the importance of transparency and full cost disclosure, but we are infuriated about some of the costs that are included in the ‘ongoing’ charge figure which are not, in fact, ongoing. We believe the fact that major capital allocators to multi-asset funds (and our major client bank: financial advisers) are forced to use the current OCF form in their illustrations to clients when mapping out life-time wealth planning is simply misleading. Further, it is likely to result in worse client outcomes over the long term given financial advisers are incentivised to choose solutions with lower OCFs.
The investment association, under the influence of the FCA, are keen that all costs are disclosed to clients so that they can be armed with this crucial information before making their investment decision. The OCF is meant to represent this. It is perhaps the most important number in asset allocation because of how it is used by intermediaries such as financial advisers. It is absolutely crucial therefore that it is accurately and uniformly calculated and presented to fund buyers using a methodology that allows for proper cost comparisons. It infuriates us that this is not the case today and we are impassioned to drive change for the benefit of end clients.
It is not simply the age-old cost vs value issue. Once people are educated that higher cost doesn’t mean more expensive they can forgive paying higher fees if post-fee returns are expected to be superior. But forcing multi-asset funds to disclose some costs is not only unfair, it is leading to arguably worst client outcomes – exactly what the FCA is trying to avoid.
Let me take the Hawksmoor Funds as an example. Our Vanbrugh Fund is now over 13 years old. After all fees, it is the number 1 fund in the sector since launch. This was not due to a few flukey years: we have never underperformed over any rolling 5 year period (from each quarter end since launch) and have outperformed in 83% of 3 year rolling periods. Enough performance stuff – this isn’t a promotional puff piece. The point I am making is that we think we run Funds that have so far provided reasonable value for money. Our “costs”, which are included in these numbers, are: 0.75% AMC, 0.17% admin costs, and 0.41% “underlying fund costs”. This is on every factsheet. Together, this makes up our OCF of 1.33%. Transactions costs, also included in the above performance figures are 0.06% and are not included in the OCF.
We have no problem including the 0.75% AMC or the 0.17% admin costs in the OCF. Both of these costs are unavoidable costs to investors in our funds. They are also ongoing. The 0.41% is the “cost” of us investing some of our clients’ money in open-ended funds (i.e. the OCFs of these funds). But these are not “ongoing” costs and nor are they unavoidable. We choose to incur these costs on behalf of our clients because we believe our clients will get better post-cost returns. It is an investment decision in the same way a UK equity fund manager might choose to invest one company over another with higher operational costs because return prospects are better.
It is arguable that these costs should be included in the OCF since they are the result of an investment decision. To be clear: we have no problem disclosing them. But to include them in an OCF figure for our own funds make them look more expensive and deters investors.
Even worse is the recent guidance from the IA which will force funds to disclose the underlying costs of investment trusts in OCF. This where our blood really boils and the very thought of it is enough to plunge me into a bad mood for hours. If forced to do this, our OCF would increase by another c. 40bps. Not many IFA firms will consider investing in a fund with an OCF of close to 2% – especially when the industry rule of thumb is that total cost of advice (platform fee + investment solution fee + cost of advice needs to come under 2%). But it is not the commercial issue that drives us mad. It is the logic. When one buys an investment trust, one buys the market valuation of the investment trust’s net asset value (NAV) – not the NAV itself. Any costs associated with the running of the trust come off the NAV – not the share price. Doesn’t this sound like an equity investment? A UK equity manager doesn’t buy the intrinsic value of company – he or she buys an equity share, which is the market’s value of that company. Not only do we think “costs” associated with an investment trust should not be disclosed within an OCF, we don’t think they should be disclosed at all – because the investor does not incur these “costs” any more than an investor in Tesco incurs the cost of hiring the staff that man the tills.
The truly awful thing here is that by forcing funds to disclose these “costs” in the OCF, capital is inevitably encouraged towards funds which don’t “incur” these “costs”. This means not investing in wonderfully talented boutique managers of open-ended funds or the many excellent investment trusts that give access to alternative asset classes that have provided superb performance over the long term, and more recently amid one of the greatest drawdowns in history for mainstream bonds!
This is a tragedy for our nation’s savers and investors and this is what makes us so irate. It not only makes little sense, it is also doing a disservice to hard-working people who save for retirement and for the next generation. And to be clear: yes, this is in Hawksmoor’s commercial interests. But let me say that funds that use investment trusts have to be capacity-constrained given their liquidity is less than mainstream equities and bonds. Hawksmoor have institutional share classes at 0.5% and 0.75% and our capacity is roughly £1bn. We have 4 Fund managers who do huge amounts of research across multiple asset classes. What is cheaper about another fund with an OCF of under 0.40% that allocates mechanically to passive indices and has a capacity of over £50bn and requires far less by way of resource? And yes, I realise we have to justify our higher fees by better performance, but thankfully we have done so far, and so do our many excellent peers that utilise a fund of funds approach – whose names I won’t drop to avoid embarrassing them or missing others out unintentionally, but a look at long-term (and short-term) performance tables will show you who they are.
Hawksmoor, in partnership with our ACD Maitland Institutional, are about to consult with the Investment Association on this issue, and ultimately hope for an audience with the FCA. We won’t rest until we have tried our hardest through the right channels to put our points across and ultimately create a level playing field for all fund managers with the ultimate goal of improving outcomes for clients. We, along with an existing coalition of fund managers, brokers and other industry professionals are trying to coordinate our efforts, and if you’d like to join the “campaign” please get in touch.
Ben Conway – Head of Fund Management
This financial promotion is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC251.