Head of Sustainability | Co-Head of Charities
A summary of the full report, Value For Money, which looks at how charity investors can better understand the fees charged by their investment manager.
The fees charged to charities by their investment managers continue to be in the spotlight. However, there is no common approach or methodology for reporting or analysing costs. Fees are often bundled or estimated, leading to a difference between those stated and those actually paid. In an era of low interest rates and low global growth, precious basis points of positive returns can be eroded through fees. The introduction of European financial regulation, MiFID II, requires companies providing investment management services to be more transparent than ever about the fees they charge. But even then, Trustees will need to ensure they are getting the best value for money out of their investment managers.
Kate Rogers, Head of Policy, and Giles Neville, Head of Charities at Cazenove Capital, ran a series of working groups over 2017 with a collection of charity representatives from all backgrounds addressing this topic. Amy Browne, Portfolio Manager at Cazenove Charities, summarises their findings in our report and sets out nine practical insights to guide your way through the process of assessing value for money.
Defining value for money
Good value for money is the optimal use of resources to achieve the intended outcomes. It is not about achieving the lowest price.
1. Appraise outcomes relative to objectives
As a charity investor, the best place to start is with your objectives: What are we trying to achieve with our assets? If your charity has investments, it should have a written investment policy that sets out what it is aiming to achieve with those investments. Apart from demonstrating good governance, a written policy provides a framework for making good investment decisions and managing resources efficiently.
In applying resources to the objectives (i.e. paying a fee), how can you best assess whether your manager is achieving them? Have in mind a list of outcomes that you would like to see demonstrated.
2. You are paying for much more than just performance
According to our feedback, the primary outcome that trustees are looking to achieve is good risk-adjusted performance. Generating a good level of financial return is clearly an important objective. However, identifying good performance is only part of the solution; finding individuals or firms with whom the institution can build a long-term relationship is often equally important.
This is a case in point when it comes to changing managers. Investment committees consider changing their managers for all sorts of reasons and it is unusual that a patch of poor performance is the only factor. Grounds for changing managers vary from consistently poor returns, to persistent breaches in investment guidelines or problems with the overall quality of service. Equally, if the services they offer change –perhaps they no longer offer investment advice, custody or cash management – then this can also be a prompt to seek an alternative option. These point to the multiplicity of roles that you are paying your investment managers to carry out in return for a fee. Put simply, the services provided by your manager go far beyond simply picking good investments.
3. Don’t simply focus on measurable outcomes
It is relatively easy to measure return, risk and cost. But that does not mean that these are the only outcomes that charity investors should be seeking. The provision of good advice is often crucial, as is safe custody and effective deal implementation. The importance of a trusted relationship, with helpful day-to-day service and timely, clear and accurate financial reporting is also valuable.
4. There is no zero cost option
Active or passive? Self-managed or outsourced? The answer to these questions will have a material impact on the fees you pay. However, it is important to note that there is no zero cost option. Even the cheapest index trackers will charge a fee and there will be a cost to owning them via a platform, including fees for custody and administration. You will, therefore, achieve market returns, but less a margin.
5. It is important to know what the costs are
The opacity of investment management fees can make it hard to know what you have paid to whom. 2018 sees the introduction of MiFID II which aims to improve transparency on costs, requiring companies providing investment management services to report the fees they charge. This should help trustees identify the cost of managing their investments.
6. Know how much you are prepared to pay and what active benefit you are expecting
As there is no zero cost option, trustees will need to debate whether to pay lower fees for passive management or to increase the fee budget in the belief that active management will deliver enhanced returns.
7. Consider the balance between private and public benefit
If managers outperform net of fees does it matter what you pay them?
In our research we came across investors holding the belief that as long as the charity was better off net of fees then the absolute level of fees doesn’t matter. We would challenge this view, and believe that the Charity Commission would also view the balance between private benefit (to the investment manager) and public benefit (to the charity) as important.
8. Diversification comes at a price
Since it’s a like-for-like comparison, it is relatively easy to assess the value for money represented by funds in the various equity markets or other single asset classes. It is much more difficult when we consider multi-asset portfolios. Counter-intuitively passive multi-asset portfolios are often less diversified than active portfolios. Active portfolios may cost more, but additional fees are hopefully paying not only for good positive performance but, because of the enhanced diversification, potentially less severe losses when markets turn negative.
9. Appraise active value added against a passive portfolio
When looking at the measurable outcomes of return, risk and cost; a useful comparison might be ‘what would an equivalent passive portfolio have delivered’. This takes into account the difference in cost in a passive portfolio alongside any impact on returns and risk. It is more accurate in appraising value for money than market benchmarks as it takes into account the fact that there is not a zero cost alternative.
The full report can be downloaded on our website
Head of Sustainability | Co-Head of Charities
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.