In the sector press

The New Year will bring greater transparency in investment management fees

20/11/2017

Kate Rogers

Kate Rogers

Head of Policy and Co-Manager - Charity Multi-Asset Fund

Kate Rogers, Portfolio Director and Head of Policy at Cazenove Charities shares her thoughts on issues faced by the charity sector in Third Sector Magazine every other month. 

There’s a new piece of regulation in the investment world. With the natty title of MiFID II (Markets in Financial Instruments Directive), the new requirements are set to take effect from the beginning of next year and is likely to mean that any charities with investment assets will be getting a letter from your investment manager, if you haven’t already had the pleasure.

This regulation will herald the beginning of a new transparency in the reporting of costs to investors, as the opacity of the investment management industry is challenged. Managers will be required to provide a full statement of the costs of investing; personalised to each client along with the impact of these costs and charges on the financial returns. Where the investment manager has invested in another fund, those underlying costs will also need to be shown.

As costs become more transparent, trustees will no doubt seek to compare the fees of one manager with another; enhancing competition. In this environment it will be even more imperative that managers can demonstrate the value that they add for the fees that their charity clients are paying. And this is a topic that I have been spending a bit of time thinking and talking about over recent months.

Our latest publication, Value for Money, summarises our main findings and proposes a framework for trustees to think about investment management fees. Costs should not be considered in isolation. They are part of an interdependent triangle which also includes risk and return. To make it even more difficult, fees are the only certainty in this equation, whereas risk and return are forecasts based on what has happened in the past. So how can trustees evaluate whether they are getting value from their investment managers?

Firstly it is important to establish what you are hoping to achieve with your investments, and make sure that you are appraising the outcomes relative to your own objectives. This makes the choice personal and relevant to your own charity’s position and ambition and means that the choice of benchmark is crucial. However, financial performance is just one part of the jigsaw; you are probably paying for more – perhaps custody of the assets, reporting and service – often  bundled within one charge. Critically, the services offered by managers vary. Some managers aren’t regulated to give advice – which means you inadvertently may not be fulfilling the Charity Commission requirement to ‘take advice from someone experienced in investment matters unless they have good reason for not doing so’. And the approach to transaction costs varies. So clarity on what you are paying for is a good starting point.

Value for money is much easier to appraise once you have this clarity on costs, and can compare the results directly with your aims. Often trustees want to use other comparators, to see whether they would have been better off investing elsewhere. Many look at market index returns, but implicit within this is the assumption of zero costs. Investing passively in index funds has its merits, but it is certainly not without cost. A fairer comparison might be a passive portfolio after fees have been charged.

Considering value for money will mean that trustees will be better equipped to understand what they are paying and what benefit they are receiving from their investment managers. As such, the fee transparency that the new regulation and New Year will bring should be celebrated. 

Author

Kate Rogers

Kate Rogers

Head of Policy and Co-Manager - Charity Multi-Asset Fund

Kate specialises in investment on behalf of charities, endowments and foundations and joined Schroders Charities in 2005 after four years with Kleinwort Benson Private Bank Charity team.

Kate is chair of the Charity Investors' Group, which is a membership organisation providing a forum for investment debate. In this role she has collaborated with CFG to launch a guide to written investment policies and 'For Good and Not For Keeps' published by the Association of Charitable Foundations in 2013. Kate also regularly writes on charity investment in the charity sector press.

Kate is also Portfolio Director at Schroders, where she manages a common investment fund, The Charity Multi-Asset Fund, which aims to generate a regular income for charities whilst protecting the capital against inflation over the longer term. She is a CFA charterholder and has a BSc (Hons) in natural sciences from the University of Durham, is Chair of her local community foundation, and governor of her local primary school.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

Contact Cazenove Charities

Achieving your charity's investment objectives takes time and thought. To find out how we can help you please contact:

Giles Neville

Giles Neville

Head of Charities giles.neville@cazenovecapital.com
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John Clifton

Business Development Manager john.clifton@cazenovecapital.com