Asset management is dysfunctional when it comes to pricing.
In a healthy industry you would expect the best-performing products to be the ones that are able to command a premium. Other factors such as economies of scale weigh in, but fundamentally if you pay more you expect higher quality.
There has long been a hope that top-performing investment funds could command premium prices, particularly after the RDR, but this type of market has simply never materialised.
The cheapest funds tend to be bond funds, regardless of performance, and issues such as whether certain fees are bundled, or indeed the fee measure being used, are still major focal points.
One of the best fund managers around, Neil Woodford, is now perversely charging some of the lowest fees around for his services at his new fund house. This doesn’t make sense.
The asset management industry is now facing unprecedented regulatory peril, with local and regional lawmakers seemingly going for blood amid criticism of the industry.
But if the very best-performing funds were also the most expensive ones, and poor-performing funds were operated at extremely low prices, the ‘active management is a rip-off’ argument would be far harder to make.
So why doesn’t fund management display premium pricing for quality funds, and vice versa?
I wonder if the problem is simply that the two separate factors – price and performance – are not effectively considered as part of the same equations in fund analysis.
There are tons of ‘dog lists’ on fund performance out there, and funds are regularly criticised on the grounds of high charges, but which funds out there charge the most for underperformance?
Where are the high-profile calculations of ‘value for money’?
There are undoubtedly calculations out there to ascertain value for money. You could simply look at how much outperformance of the benchmark each basis point of ongoing charges bought you, for example.
If such a ‘value for money’ calculation could be published prominently and put at the heart of fund selection, the industry’s pricing activities would begin to rationalise. Mr Woodford could charge more and perennial ‘dog fund’ managers would be forced to slash their fees.
Within each sector, funds could be ranked by ‘value for money’ into quartiles or deciles, enabling investors to see where the value lies.
What would be really useful would be a figure that considered fees past and present and the consistency of long-term returns, as well as the absolute scale of alpha delivered. Clearly this would be complex, but surely ‘do-able’.
I would love to hear from any statistics geeks out there who know of a calculation that could be used for this.
John Kenchington is editor of Investment Adviser
