Few managers justify higher than average fees

In a year during which a number of fund managers made a splash about cutting fees, Mike Taylor writes that the latest Money Management Fund Manager Fee Comparator based on FE Analytics has confirmed that high fees paid to fund managers will not necessarily buy significant outperformance.

The superannuation industry has been applying downward pressure on fund manager fees for most of the past decade, but the trend has been less evident in the retail/advised space – something which underscores the distinct differences between fees charged on virtually identical products between wholesale and retail clients.

However, at a time when investment choices and value for money are being placed under the spotlight in the context of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services, some increasingly hard questions are being asked.

The bottom line is that Money Management’s 2018 Fee Comparator exercise has confirmed that a number of fund managers need to reflect upon the value they are delivering to investors for the fees that they charge. In at least one instance, a manager said its fund’s relative performance would be prompting it to undertake a review.

There are, of course, justifications for some managers charging higher fees than others. Australian Ethical, for example, can legitimately point to the cost of running ethical screens across its investments. Money Management’s past interviews with advisers have confirmed that clients are willing to pay more to back investments which achieve ethically-sustainable outcomes.

There is also the reality that a number of higher-fee funds are the sub-set of lower-cost wholesale offerings, while others attribute their high fees to the complexity of their investment approach and still others quite legitimately point to the fact that the times are not suiting them; that their strategies are contrarian and targeted at taking advantage of a different point in the investment cycle.

The bottom line, however, is that with one or two exceptions the highest fee-charging fund managers have tended to perform consistent with the average rather than actually shooting the lights out.

Among those exceptions was the CFS FirstChoice Acadian Wholesale Geared Global Equity Fund which, while charging the high fee amongst its peers of 2.55 per cent, nonetheless generated a return of 24.63 per cent – well above those of its peers.

So, the bottom line for advisers and their clients is that some expensive fund managers do actually justify their high fees with significant outperformance, but in 2018 less than 10 per cent of those examined by Money Management actually made the grade.

Mid and small-cap outperformance comes at a cost  

Investing in the “companies of tomorrow” or those with an ESG focus at the smaller end of the ASX doesn’t always come cheap, as Nicholas Grove discovers. 

Within the Australian Small/Mid Cap Equity sector, the highest management fee of 3.0344 per cent per annum is charged by the Pendal Microcap Opportunities Fund, a strategy which has performed in line with the sector over one year to 31 May, 2018, delivering a 21.08 per cent return compared to the sector’s 21.45 per cent.

However, it has outperformed the sector over three years to 31 May, 2018, returning 15.78 per cent compared to the sector’s 12.12 per cent.

The fund, which aims to provide a return (before fees, costs and taxes) that exceeds the S&P/ASX Small Ordinaries Accumulation Index over the medium to long term, invests primarily in a portfolio of 40-60 Australian companies with market capitalisation or free float of generally less than $1501 million at initial investment that it believes are trading below their assessed valuation.

The fund may also invest in equivalent companies listed on the New Zealand Stock Exchange.

Next in line down the fee scale in the Small/Mid Cap Equity sector is the CFS MIF Developing Companies Fund, which charges a management fee of 2.27 per cent per annum and has only slightly underperformed the sector over the same one-year period to 31 May, returning 20.71 per cent versus the sector’s 21.45 per cent.

On an annualised three-year basis, the fund has returned 14.87 per cent versus 12.12 per cent for the sector.

The strategy aims to provide long-term capital growth that exceeds the S&P/ASX Small Ordinaries Accumulation 201-300 Index over rolling three-year periods before fees and taxes.

Colonial First State said its growth approach is based on the belief that, over the medium to long term, stock prices are driven by the ability of management to generate excess returns over their cost of capital in their chosen industry.

The strategy of the fund is therefore to invest in very small companies, with strong balance sheets, whose earnings are expected to grow at a greater rate than the Australian economy as a whole.

In the same sector and charging a management fee of 2.25 per cent per annum and underperforming the sector on an annualised one and three-year basis is the Yarra Emerging Leaders Direct Fund, which delivered total returns of 17.44 per cent over one year versus the sector’s 21.45 per cent, and 8.38 per cent over three years versus 12.12 per cent for the sector.

While Yarra Capital Management declined to provide comment on the strategy’s performance versus the sector, the manager pointed out that since its inception the fund has significantly outperformed its benchmark (which is 50 per cent the S&P/ASX Midcap 50 Accumulation Index and 50 per cent the S&P/ASX Small Ordinaries Accumulation Index), delivering 11.75 per cent per annum net of fees, representing an outperformance of 3.17 per cent per annum.

It also said that the fund is ahead of its benchmark for 10-year returns (+1.43 per cent per annum) and is only “marginally negative” over the past five years (-0.44 per cent per annum). The fund is closed to new investors.

As long-term investors, Yarra Capital Management said it is focused on the delivery of “strong, risk-adjusted returns over five to seven-plus year periods”.

Charging a management fee of 2.2 per cent per annum is the Australian Ethical Emerging Companies Fund, which has underperformed the ACS Equity - Australia Small/Mid Cap sector on a one-year basis, posting a 13.76 per cent total return versus the sector’s 21.45 per cent. (Given the fund’s inception date of July, 2015, three-year comparative return data is not yet available.)

The fund aims to provide long-term growth by investing in a diversified portfolio of shares in small capitalisation companies on the basis of their social, environmental and financial credentials.

The fund utilises an active stock-picking management style with stocks selected for growth rather than income. All stocks are chosen on the basis of relative value where the manager deems the risks are being adequately priced.

According to Leah Willis, head of client relationships at Australian Ethical Investment, the justification behind the management fee is that it is a reflection of the shop’s ethical approach, small-cap exposure, and active management approach.

Lastly, and charging a management fee of 2.15 per cent per annum is the SGH Micro Cap Trust, a fund which has delivered a total return of 3.23 per cent for the year to 31 May, 2018, compared to the sector’s return of 21.45 per cent.

Over the three years to 31 May, 2018, the strategy returned 1.52 per cent, compared to the sector’s 12.12 per cent.

The fund aims to deliver superior medium to long-term returns by investing in listed companies which generally have market capitalisations less than $500 million.

The fund aims to generate returns in excess of 10 per cent per annum over a five to seven-year period.

SG Hiscock research and platform manager, Nick Simpson, told Money Management that the manager was currently reviewing the fund’s structure, “with the fee being one measure that will be subject to change”.

Momentum market favours growth over value 

While the market may have been more favourable to growth stock managers, Nicholas Grove finds that value investors may soon have their moment in the sun, justifying their high fees. 

Within the ACS Equity – Australia sector, the Maple-Brown Abbott Australian Share Ordinary fund, which charges an annual management fee of 2.05 per cent per annum, has underperformed the sector over one and three-year periods to 31 May, 2018.

The strategy has returned 4.68 per cent versus 10.30 per cent for the sector over one year, and 2.29 per cent versus 5.68 per cent for the sector over three years.

The fund aims to outperform (before fees) the S&P 200 Index (Total Returns) over rolling four-year periods. It aims to invest in a wide range of Australian shares, chosen for their perceived fundamental value. 

The manager said while the headline fee is 2.05 per cent, the actual fee received by Maple-Brown Abbott is lower due to established trail commission arrangements in place when the manager took on the management rights of the fund in 2011 from Advance Bank.

Maple-Brown Abbott told Money Management that while the fee issue is obviously highlighted when the fund is underperforming, “as an active manager that is considered by both our clients and researchers alike to remain ‘true to our value style,’ we are well aware of the challenges of a momentum market which clearly supports a growth investment style”.

The manager also said its view is that the value style may be set for a “much better period” as the extreme valuations that many of the most sought-after growth stocks have recently enjoyed may ultimately reverse, both from the weight of expectation and the normalisation of interest rates.

Within the same sector, the ClearView Managed Investments Australian Shares Growth fund, which charges a management fee of 2.3 per cent per annum, has only slightly underperformed the ACS Equity – Australia sector over one and three-year periods.

The fund has returned 9.99 per cent over one year versus 10.30 per cent for the sector, and 5.44 per cent versus 5.68 per cent for the sector over three years.

ClearView pointed out that the fee is all inclusive of administration, transactions and advice costs.

In addition, the manager said it offers a family fee rebate of up to 0.9 per cent on combined balances across its traditional products for all family members, which can reduce the fee significantly.

The BT Investor Choice Westpac All Australian Tax Effective Share NEF, which charges a management fee of 2.2 per cent per annum, only slightly underperformed the ACS Equity – Australia sector over a one -year period, returning 10.18 per cent versus 10.30 per cent for the index.

The strategy has underperformed the sector over a three-year period, with a total return of 3.73 per cent versus 5.68 per cent for the sector.

The fund’s objective is to provide tax-effective income plus capital growth over the recommended investment timeframe of five years or more.

When queried about the high management fee, a BT spokesperson described the BT Investor Choice Westpac All Australian Tax Effective Share NEF as a “legacy” fund, which is maintained to ensure investors can continue to hold their investment should they choose to do so.

“It’s important for investors to seek professional advice to determine if it remains appropriate to maintain their investment holdings based on their needs and circumstances, including their current tax position,” the spokesperson said.

In the same sector, the Australian Ethical Australian Shares fund, which charges a management fee of 2.5 per cent per annum, has delivered a mixed performance over one and three-year periods.

Over one year, the strategy has delivered a total return of 6.88 per cent versus the sector’s 12.26 per cent, while over three years the strategy has posted total returns of 10.34 per cent versus the sector’s 8.45 per cent.

The fund aims to invest in a diversified share portfolio of companies predominately listed on the ASX and selected on the basis of their social, environmental and financial credentials.

Charging a management fee of 2.3 per cent per annum is the Armytage Strategic Opportunities Fund, which has managed to outperform the ACS Equity – Australia sector over one and three-year periods.

The strategy has posted a one-year total return of 14.13 per cent versus the sector’s 10.30 per cent, and a three-year return of 6.96 per cent versus 5.68 per cent for the sector.

The fund is managed with a view to offer investors long-term capital growth potential and a regular semi-annual income stream, from a portfolio of micro, small and large-capitalisation investments that Armytage considers to be of high quality and good value.

Does going global mean paying more for less?  

The global equities sector is underperforming across the board, and as Anastasia Santoreneos writes, even the most expensive funds, three of which belong to Australian Ethical, have struggled to break the mould. 

The funds in the global equities sector charge an average of 0.99 per cent in fees, and have produced average returns of 8.41 per cent across the past 12 months to 31 May, but only one of the most expensive funds has managed to produce top quartile returns.

The seven most expensive funds have charged between 2.55 per cent and 2.15 per cent, and have generally fallen below the line for total returns, which suggests investors might be paying more for less. 
CFS’ FirstChoice Acadian Wholesale Geared Global Equity fund was the most expensive fund, charging investors fees of 2.55 per cent, a 0.35 per cent increase on last year’s most expensive fund, Australian Ethical’s International Shares Fund, which charged 2.20 per cent.  

It was one of three funds to outperform the sector average across the 12 months to May’s end, sitting in fifth place with top-quartile returns of 21.99 per centdata from FE Analytics shows. 

The Fidante Credit Suisse Global Private Equity Fund was the second-highest charging fund this year with fees of 2.35 per cent, yet its performance was lacklustre, producing returns of 5.49 per cent over the year to 31 May and 1.20 per cent over three years.

The core-satellite manager, Fidante, declined to comment on the fund’s fees and performance.  

Australian Ethical’s Advocacy, Diversified Shares and International Shares’ Fund each charged fees of 2.20 per cent and underperformed the sector average. 

The Advocacy fund returned 6.03 per cent in the year to 31 May, the International Shares fund returned 3.14 per cent and the Diversified Shares fund returned 5.93 per cent, placing them in the bottom quartile for the sector. 

Head of client relationships at Australian Ethical, Leah Willis, noted that while the Advocacy and Diversified Shares fund sat in the global equities sector, they were in fact geared to Australian equities, with 75 per cent of shares resting in Australia and the other 25 per cent placed internationally. 

“Comparisons to the international sector funds are misplaced,” she said. 

She also stressed the fees observed were for the retail funds, not their wholesale counterparts, which had management expense ratios of 0.95 per cent.

This was also true for the International Shares Fund, but failed to explain the high fees.

“FE is referring to the retail fund, as distinct from Australian Ethical’s Wholesale International Shares Fund that has a highly competitive management expense ratio of 0.85 per cent,” she said. 

However, last year chief investment officer of Australian Ethical, David Marci, told Money Management that there were extra costs to employ ethical screens of the investment universe.

The AMP Generations International Equities Hedged Fund and the BT Diversified Share Retail Fund charged 2.15 per cent in fees, still more than double the average fee of the sector. 

AMP told Money Management that the fees seemed higher as they represented a “bundling of investments fees with advice and platform fees”, and, given the Australian dollar has been in decline over the past five years, currency-hedged funds have tended to lag their unhedged counterparts. 

AMP added that the underlying investment portfolios were delivering returns in line with their performance expectations, which was one per cent above the MSCI World ex-Australia index.

AMP said they regularly reviewed their product offerings to make sure they remained relevant and competitively priced. 

A spokesperson from BT told Money Management that the fund was a legacy fund and was closed to new investors. 

The second-quartile AMP and BT funds underperformed the sector average across three and five-year periods, but outperformed in the year to 31 May by 0.22 and 1.26 per cent respectively. 

Do Aussie Bonds Funds give what they take?  

It’s not always a case of you get what you pay for in Australian Bonds, Hannah Wootton writes, with the most expensive funds turning out some of the best and worst performances in the sector. 

The Australian Ethical Fixed Interest Trust is the highest charging fund in the Fixed Interest – Australian Bonds sector for the second year running. Their fee of 1.5 per cent per annum, which remains unchanged from last year, is over triple the sector average of 0.411 per cent.

Investors aren’t getting value for money either. The trust’s yearly and three-yearly returns of 31 May, 2018 of 0.24 and 1.37 per cent respectively are both in the bottom 10 per cent of the sector for those periods.

In response to questions regarding the trust’s fees, Australian Ethical Investment’s head of client relationships, Leah Willis, pointed out that the wholesale version of the fund had lower fees.

Of course, as Money Management was looking at the retail option, this doesn’t offer much by way of explanation.

When asked about the Fixed Interest Trust’s fees last year though, Australian Ethical’s chief investment officer shed some light on this, saying that the wholesale option was the focus of more attention by the firm, hence the higher fee for its retail counterpart.

It’s also worth considering that some investors look for more than just returns when investing, and those turning to Australian Ethical may be willing to pay more for its ethical screening. This comes at a cost.

“Our Ethical Charter guides all investments and means we will differ considerably from mainstream funds, and fees are reflective of this specialist exposure,” Willis said.

BT’s Investor Choice Westpac Australian Bond Fund, with fees of 1.07 per cent per annum, gave investors similarly poor returns for very high fees relative to the sector.

Its returns of 0.85 and 1.85 per cent for the year and three years to May’s end, 2018 respectively were in the 88th and 83rd percentile for the sector for each period.

This is significantly below the sector average of 1.6 per cent for the year to 31 May and 2.37 per cent for the three years.

A BT spokesperson pinned the high fees on the Australian Bond Fund being a legacy product, although Money Management notes that it is still open to new business.

In brief commentary, the spokesperson said: “Older funds are maintained to ensure investors can continue to hold their investment if they choose”.

ANZ’s Fixed Interest Trust also delivered low performance for high costs to investors. Its fees of 1.14 per cent, the second highest in the sector, were coupled with performances in the sector’s bottom 89th and 71st percentiles for the year and three years to 31 May, 2018 respectively.

The bank’s wealth division declined to comment on either its fees or performance.

The remaining two funds in the top five for highest fees gave stellar returns, suggesting that sometimes you do get what you pay for.

The DDH Preferred Income Fund, which was ranked fourth for highest fees both this year and last, charged 0.82 per cent per annum but also consistently gave investors returns close to the highest in the sector.

Its returns of 4.15 per cent for the year to May’s end, 2018 and 4.52 per cent for the three years were the third highest in the sector each time. The Fixed Interest – Australian Bonds sector contained 88 and 82 funds respectively for those periods.

The DDH Fund’s investment manager, Renny Ellis, said the fund had a wider mandate than most other Aussie fixed income managers, which may explain its costs.

The range of securities covered by the fund covers everything from Sovereign AAA bonds to convertible debt, for example, and its fixed and credit duration can be adjusted strategically at any time.

Furthermore, the fund is quite small now. Its current size of $89.5 million limits its economies of scale. Ellis said that introduction of lower administration fee tiering is anticipated after the fund reaches $150 million funds under management.

The Trust Company Bond’s relatively high fees of 0.72 per cent also delivered strong performance. Its yearly returns to 31 May, 2018 of 2.82 per cent were the ninth highest in the sector, while its three-year returns of 3.31 per cent were placed sixth.

Perpetual, which manages the fund, declined to comment to Money Management.

High fees pair with underperformance for Global Bond funds  

Hannah Wootton finds that the most expensive fund in the Fixed Interest – Global Bonds sector is also its worst performer. 

In the Fixed Interest – Global Bonds sector, it’s a mixed bag in terms of getting what you pay for.

Charging fees of 1.25 per cent annum, the Mercer Emerging Markets Debt Fund has the highest cost to consumers of all funds in the sector. This is significantly above the sector average of 0.605 per cent per annum.

With a yearly return of -3.87 per cent until 31 May, 2018, data from FE Analytics shows that it’s also the worst performer in the sector for that time period.

Its longer-term performance wasn’t stellar either. For the three years to May’s end, its returns of 2.19 per cent annualised placed it in the second bottom quartile for performance in the sector.

By contrast, the Supervised Global Income Fund charges the third highest fees at one per cent per annum, but also delivered investors the highest performance in the sector over both the year and three years to 31 May, 2018.

It returned 5.56 and 5.75 per cent for those time periods respectively, far outstripping the sector average of 1.12 and 2.87 per cent, again for each period.

Mercer portfolio manager, fixed interest, David Little, pointed to the volatility and complexity of emerging market debt (EMD) as a key reason for the Mercer Emerging Markets Debt Fund’s high fees, saying that they often require a higher level of resources than other sectors.

There are a larger number of EM-related markets to analyse, for example, with more idiosyncratic issues to consider. There’s also less investment research information freely available on them.

Supervised Investments chief executive, Michael Ohlsson, pointed out that although the Global Income Fund’s headline fee was above that of the sector’s average, the all-round costs for investors entering the fund would be similar to those of its peers.

The fund’s indirect cost ratio was closer to the average, while its complete lack of performance fees significantly brought down its overall costs relative to the sector.

Ohlsson also drove home that the fund’s success made it worth the cost: “It’s all about net return to our clients - none of them complain about our headline base management fee!”

The AMP Capital Future Directions International Bond 3C Fund had the second highest fees with 1.04 per cent per annum. Investors at least were rewarded for their investment though, with the fund’s three-year performance to 31 May, this year being in the 11th percentile for the sector.

Its past year’s returns of 1.50 per cent were also decent compared to its peers, sitting in the 28th percentile.

Explaining the high fees, an AMP Capital spokesperson said: “The Future Directions International Bond Fund takes a multi-manager approach that provides investors access to multiple specialist fixed income managers, styles and diversification benefits in the one product.”

“In this approach, the management fee may be slightly higher compared to some passive, single-manager global bond funds.”

It’s worth noting that the fund was only compared to active funds for this piece.

The Franklin Templeton Multisector Bond W and Lazard Emerging Markets Total Return Debt funds rounded out the top five highest charging funds for the sector, with fees of 0.93 and 0.9 per cent per annum, respectively.

With returns of 0.79 per cent in the three years to 31 May, 2018, the Franklin Templeton fund did not exactly give investors value for money. Indeed, it was ranked in the 97th percentile for the sector over this period.

Its performance only worsened comparatively to the sector over the last year, too. With returns of -1.87 per cent for the year to May’s end, the fund was in the 98th percentile against its peers for the year.

“For this fund, the investment team researches more than 50 countries, which requires a greater level of team resources compared to the majority of the global bond peers in the Australian market; and which in most cases would focus on the G7 rather than our broad universe,” a Franklin Templeton company spokesperson said by way of explanation.

Lazard’s investors similarly didn’t get good returns on their money in the Emerging Markets Total Return Debt Fund.

In exchange for their high fees, investors saw returns of 1.83 per cent for the three years to 31 May, this year, and -1.36 for the year until that date. These returns were in the bottom 87th and 91st percentile of the Fixed Interest – Global Bonds sector respectively. 

Lazard declined to speak to Money Management regarding the fund’s fees or performance.

Returns do not justify high fees  

Oksana Patron finds that those who charged the highest fees in the Australia listed property sector have not delivered desired results.

A Money Management analysis, based on FE Analytics, has found that in a reversal of last year’s findings for the Australian listed property sector, managed investment schemes with the highest fees have disappointed investors by not delivering the desired results.

Based on their performance over the 12 months to 31 May, 2018, all but one were sitting in the bottom quartile and below the sector average of 4.90 per cent. 

At the same time, the highest fees across the sector have significantly increased since last year, with the most expensive fund this year being the BT Investor Choice Westpac Australian Property Securities NEF, which charged an annual management fee of 2.2 per cent.

According to a comment provided by BT, this was a legacy fund, which is now closed to new investors, and was only maintained to “ensure investors can continue to hold their investment if they choose”. 

Another fund managed by Westpac/BT, which also was one of the top five most expensive in the sector, was Westpac Australian Property Securities Retail, with an annual management fee of 1.58 per cent and total returns of 3.30 per cent for the past 12 months to May. 

At the same time, Antares Listed Property Personal declined to comment why it charged a 1.95 per cent annual management fee, which, after excluding the platform funds, topped the list.

It returned 4.90 per cent and 6.98 per cent over 12 months (to 31 May, 2018) and three years, respectively, and in each case it underperformed its benchmark the S&P/ASX 200 A-REIT Accumulation Index, which returned, 5.29 and 9.81 per cent over the same time periods, according to FE Analytics.

The SGH Property Securities product, which has a management fee of 1.7 per cent and is currently closed to new investors, was the only fund that landed in the third quartile with returns of 4.38 per cent over past twelve months to 31 May, 2018.

SG Hiscock’s research and platform manager, Nick Simpson, explained that the fund was set up in 1994, but the firm was appointed as its investment manager in 2010, hence SGH had no involvement in the setup of the original fee. 

“Our understanding is the fund fee was set up with a higher fee as it was designed for those with small balances,” he said. “We will be sitting down with the product issuer Fidante Partners to see whether this fee should be revised.”

He also pointed out to the firm’s headline fund which was still open to new investment, the SG Hiscock Property Opportunities Fund, and which was invested in the same pool of assets as SGH Property Securities, but with a lower fee of 0.85 per cent.

Furthermore, the IPAC Pathways Australian Property Securities Fund charged 1.32 per cent in its annual management fee, yet returned 4.30 per cent over the 12 months to 31 May, 2018, which was well below its S&P ASX 200 A-REIT Sector Index benchmark.

A spokesperson from AMP Capital said: “The IPAC Pathways Australian property securities fund is performing in line with benchmark and ahead of its peers.”

However, according to FE Analytics, over the three-year period the IPAC Pathways Australian Property Securities returned 8.46 per cent while the S&P ASX 200 A-REIT Sector Index returned 9.81 per cent.

“The fees appear high because they are older-style products where the fee represents the bundling of investment fees with advice and platform fees,” the spokesperson said. 

“While newer style funds (post FOFA) may seem to have a lower investment fee, clients have to pay for platform and advice separately. Once advice and platform fees are stripped out, the investment component of the fee is in line with industry norms.”

Fee Comparator methodology

In its second year, Money Management’s Fee Comparator report looked at the Australian equities, Australian small/mid cap equities, Australian fixed income, global fixed income, international equities and Australian listed property sectors.

Using FE Analytics, the FE data team looked at the entire Australian managed investments universe, including both retail and wholesale funds in its analysis but excluding institutional funds.

Both retail and wholesale funds with initial investments of $100,000 or under were included as there is currently no standard definition of what a wholesale fund is in terms of minimum investment.

The comparisons were then completed on all funds that had pricing information available from within the last three years.

Unsurprisingly most of the funds that had high fees were retail funds. Although these funds may have also had a wholesale offering, the retail fees were generally higher and therefore, when applicable, they were still included on the Fee Comparator lists.