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Why bps should not be the value measurement when investing

27 July 2020

Value is measured by more than an AMC figure, as the current crisis shows us, argues  David Coombs, Fund Manager, Rathbone Multi-Asset Portfolio Funds

I took my Mediterranean holiday in Wiltshire this year. Unfortunately, the weather was distinctly Welsh and I returned to work – uh, same place as the holiday – rather rusty.

Even worse, I still haven’t had a refund on my flights despite them being cancelled many weeks ago. This got me musing over the pointy end of customer care and value for money. Usually, these issues tend to be abstract and theoretical when you’re an investor discussing them with company management. These days, it is very easy to understand the plight of customers fighting poor service.

I have booked two holidays over the past six months, one with a boutique agent and one with mass market platform Expedia. With the boutique I got a personal agent who keeps in regular contact and advises me of any changes and what’s going on. He gives you his direct contact details while you are on the holiday and takes away all the stress. This is brilliant, yet, as you can guess, not cheap. Expedia is much cheaper.

My holiday at the beginning of June, booked through Expedia was cancelled, obviously through no fault of its own. It didn’t inform me, however. I found out because the BA app told me my flight was cancelled. Despite it being covered by the Civil Aviation Authority’s ATOL financial protection scheme (it was a package), I was told by Expedia customer services that I wasn’t necessarily entitled to a refund. I quoted the ATOL website but was told it was out of date. When I mentioned it was shown under the heading “COVID 19 Update Portal” the agent quickly changed his mind and said I was covered, and that he hadn’t actually told me otherwise. It was truly like a Monty Python sketch. Meanwhile, I still haven’t received the refund.

I’m confident that my travel boutique would have dealt with all this hassle for me, as he has in the past. For me, that would have been worth paying for. So often, a lower-cost option turns out to be lower value and higher risk. It’s only when things go wrong that we typically appreciate value for money. Guess who I will be using when booking my next holiday?

It’s the same in any industry and asset management is no exception. In a 10-year bull market where virtually everything went up, value becomes price: you buy the market the cheapest way possible. Yet will the March crash bring about a reappraisal? Over the past week or so, markets have seemed relatively becalmed, giving me some time to dwell on our own customer service. I’ve been reviewing what we’ve done with our multi-asset funds over the past three months and how we’ve kept our investors abreast of what’s going on. I keep asking myself, have we offered our investors value for money?

The press has been pouring over the new value statements that asset managers have been producing, leaping on those that have underperformed – quite rightly, too.

But are returns and price the only metric upon which to judge value? What about risk, communication, transparency and corporate engagement levels? How should we measure these criteria? Should we? Are they quantitative or qualitative? What should be the order of priorities and are they the same for every client? Clearly, these areas are very difficult for retail customers to make judgements, so this is where advice has a big role to play.

I will also be keen to see if the passive industry comes under more scrutiny on some of these softer issues when their value statements are pored over. For example, how were the constituents selected in specialist ETFs? What are the full transactional costs included in ETFs charges figures? How well did the ‘managers’ communicate with investors during the worst days of the crisis? When they say they are engaging with companies – how active are they really or are they just ticking boxes and filing reports?

I passionately believe in active management and feel that allocation of every pound of capital should be made carefully rather than just ‘sticking it in the market’. I believe we shouldn’t reward poor management teams or companies acting inappropriately, for example. If you invest passively, you almost certainly will do.

So what should the price be for active management? We have looked at what savings we could hypothetically make if our Strategic Growth Fund was invested passively from the ‘bottom-up’ using active asset allocation. We used its current asset allocation and created a portfolio of relevant ETFs from a number of providers for best fit.

The saving? Zero. The ongoing charges figure (OCF) was completely unchanged.

Our annual management charge (AMC) is 50 basis points. AMCs of multi-asset passive funds vary greatly – I guess depending on the level of active asset allocation and the number of asset classes used. 30bps appears to be a market level, but it’s hard to be scientific. So, you could make an argument that we are charging a premium of, roughly, 20bps for active management that includes exposure to specialised portfolio protection, such as currency hedging and put options. On top of that, since lockdown we’ve held seven webcasts and posted numerous blogs to keep our investors in the loop.

So, do I feel we provided value for money over the past three months? Sorry, not for me to answer. But please let us know what you think.

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