The banks be stealing our ETFs!
Exchange traded products – everyone wants a piece of this pie.
Exchange traded funds started as an investment management product. They were run by investment managers, who had to build scale in order to make any money out of them.
Then the European regulations allowed funds to use swaps and investment bankers realised there was an opportunity to use their skills. Lyxor, an offshoot of Societe Generale, but not its asset manager, and db x-trackers set out to promote their synthetically replicated ETFs, but still claimed they were offering investment management.
Hedge fund managers are often castigated for their high fees, while even traditional fund managers do not seem to think there is any advantage to offering lower-priced products than their neighbours. Although overcharging is never to be condoned, however, it may be in some cases that the consumer is simply not paying attention to what they are paying for their services.
This week I met some representatives from French independent asset manager Financiére de l’Echiquier, who conveyed a sense of their company as one that ticks all sorts of boxes as consistent, stable, responsible and a good employer.
This disarmed me slightly as I had planned to go in all guns blazing to attack them for what I thought were unconscionably high fund fees of 2.392 per cent a year. That’s fees alone – for comparison, in the UK, the average total expense ratio (fees plus expenses) is 1.7 per cent.
When I finally challenged them, instead of whipping off their friendly masks to reveal the evilly grinning features of Mammon-worshippers grinding the faces of the poor, they looked a bit surprised.
“But those fees are pretty much in line with the average,” was the response, followed by a thoughtful pause. “Do you know, that is the very first time anyone has ever asked about our fees.”
That is after all how capitalism works. You charge as high a price as the market will bear and the European fund market will still bear very high prices.
Asset managers like to boast of their lovely cushiony profit margins, but their profitability is another matter entirely. According to a survey by SimCorp Strategy Lab, nearly half of investment management businesses are struggling to break even.
They calculate a cost rate by subtracting ebit (earnings before interest and tax) from gross revenue and expressing the result as a percentage of gross revenue. Less than 20 per cent managed to keep that cost rate below 85 per cent, while 41 per cent saw it rise to 99 per cent or above.
FTfm reports the results of the survey but we would like to know what you think. Is asset management industry really this difficult to make a profit in? Is this a reasonable way to think about profitability? And are investment managers really as clueless about cost control as the survey authors think?
Octopus Investments has just passed the £1bn mark in funds under management. Simon Rogerson, the CEO, and Guy Myles, managing director, are celebrating by shaving their heads.
This traditional asset management ritual will take place in a few weeks time at Westminster Boating Base.
The question FTfm is asking itself: What will Larry Fink do when the merged Blackrock/BGI hits $3 trillion?
Alice hears the evidence
`They told me you had been to her,
And mentioned me to him:
She gave me a good character,
But said I could not swim.
I gave her one, they gave him two,
You gave us three or more;
They all returned from him to you,
Though they were mine before.’
These verses from Lewis Carroll’s Alice in Wonderland are usually thought to be meaningless (Alice didn’t believe there was an atom of meaning in it), but they might not be a bad representation of fund management’s stock lending programmes.
Party on: Linzi Stoppard from Fuse
The party atmosphere was definitely lacking in Monaco this year for Fund Forum. Numbers were down and the usual lavish entertainment had been credit crunched. Still, the organisers professed themselves pleased with the turnout, and with the numbers of chief execs who turned up to sit on panels or address the conference.
Some providers were still doing things in style, but they were mostly the asset servicing arms of the banks. I enjoyed an evening at a swanky hotel by the sea courtesy of BNY Mellon, including a performance by electric violin duo Fuse. It was just right for Monaco!
It’s time the asset management industry held boards to account for not listening to what fund managers are saying over corporate governance issues.