At a rather trying male-dominated dinner a few years ago, I sat next to a very senior Standard Life executive. After he had made it clear he wasn’t mad for journalists, he went on to make it extra clear by suggesting that if consumers had lost any confidence in the asset management community over the past decade (they have) this was not in any way related to any failure on the part of said asset management community. It was instead the fault of the kind of journalists who get a kick out of stirring up trouble.
We didn’t talk much more after that. He isn’t in his job any more. But I suspect that, by now, even he can see that the traditional fund management business has the kind of problems that really can’t be batted away as crazy figments of the bitter imaginations of doom-mongering journalists.
Problem number one: there’s a new(ish) kid in town. Passive funds have grown four times faster than actively managed funds since 2007 and the bestselling one in the UK (the iShares S&P 500) has approaching £60bn under management.
New funds offer full asset allocation options using passive holdings (the Vanguard LifeStrategy funds being the obvious example), something that appears to take away pretty much any investing problems any of us have ever had.
Most of the new online wealth managers popping up (Nutmeg, Wealthify, Netwealth, Moneyfarm, to name just a few) have automatically turned to passive funds to make their businesses work for consumers (ie, be simple and inexpensive).
Even Warren Buffett, the man who has been playing the role of active fund manager hero to the industry for 40-odd years, has announced that 90% of the money he is leaving should go into a low-cost tracker fund.
Problem number two: the existence of the new kid lays bare the shoddy but oddly enduring business model of the average active fund manager (overcharge, underperform and assume dimwit end investor won’t notice).
Problem number three: the result is that pretty much everyone, including the regulator, has noticed. The Financial Conduct Authority’s latest consultation on the asset management industry finds that price competition has been weak; that despite there being “a large number of firms in the market” (for which read “too many”) the asset management industry “has seen sustained high profits” (think margins of 40%-45%). And that’s despite unclear objectives and endless use of “inappropriate” benchmarks.
It then suggests that the obvious solution is to remove the fee-gathering fund manager’s greatest weapon: obfuscation. The FCA wants an all-in fee that includes every single cost and is easily comparable; it wants transparency and standardisation across the board; it wants underperformance to be obvious; and it wants independent oversight on fund committees.
This is all miserable news for the fund management business. For years, the big firms have managed to make hay on the back of consumer apathy and ignorance (more than half of UK fund investors don’t know if they are paying charges or not). That’s changing. The pace has been slow, but the pressure has been growing — and the pace might now be about to pick up, fast — something that will be very good news for consumers.
And the big signal of this in the UK? The newly announced merger between Standard Life and Aberdeen Asset Management, both based in Scotland (charmingly, Twitter has coined the contraction “Staberdeen” to refer to the merged entity).
I bumped into Aberdeen chief executive Martin Gilbert at the Pensions and Lifetime Savings Association conference in Edinburgh this week. He clearly gets that the FCA get it; that consumers are beginning to get it and that “business as usual” isn’t an option for asset managers.
He knows that 40%-45% margins have to be “disrupted”, that the industry has to “get back the trust”; that an all-in fee is coming whether his peers want it or not (“it’s always best just to do what the regulator wants”); and that if an active management firm wants to survive, it has to either be obviously brilliant at creating consistently market beating funds (really hard) or be huge (probably easier).
This deal is clearly all about the latter: the combined entity will manage £660bn.
The politics of all this will be fun to watch (Mr Gilbert has agreed to a joint chief executive role with Standard Life boss Keith Skeoch and, while Mr Gilbert’s suggestion that this is OK because there is “lots to do” makes sense, this kind of thing usually ends in carnage).
But if you are looking towards Edinburgh as a home for your cash, you might want to stop and ask (as a top heckler did from the audience when Mr Gilbert was on stage at the PLSA) whether scale in asset management is really good for us, the consumer.
Look at lists of top-performing funds and you will more often than not find they are dominated by small- and medium-sized asset management firms. You will also note that the best performance tends to come from the kind of funds that are the hardest to sell: the smaller, newer ones.
With that in mind, I am going to suggest that for now at least we view the Aberdeen Standard Life merger as two things — hugely entertaining and a neat marker of a turning point for the UK asset management industry — but that we also humour the rest of Edinburgh by putting new money into funds run by some of the smaller active managers in the city.
I’m thinking of the ones aiming for focus and excellence over scale. The obvious one I have mentioned here before. It is Kennox Asset Management. The firm runs one global equity fund — the Kennox Strategic Value Fund — with £260m in it (rather less than £660bn). Otherwise, consider looking at the Independent Investment Trust run out of Edinburgh by Max Ward, the range of funds offered by Saracen Fund Managers (the UK Alpha Fund has a mixed short-term but excellent long-term record) and funds from Aberforth, which specialises (very successfully) in smaller companies.
• This article was first published in the Financial Times