Fund managers pick up on institutional demand
Fund promoters in Europe continue to respond to an increased institutional demand for pooled fund products, by adding entirely separate classes of shares for institutional investors, who either do not qualify for or do not want a segregated ac-count, but who don't want to be saddled with typical retail fund charges either.
Mutual funds have traditionally been viewed as a retail product and have been priced accordingly, with front-end fees and trail commission fees. In the US, the fund management community has created a variety of share classes for institutional portfolios; what one fund manager describes as 'pricing alphabet soup', with all manner of different charging structures.
The norm in Europe is for a Luxembourg or Dublin umbrella to include A and B shares. Most groups offering Luxembourg funds, which can be structured to provide investors with shares with flexible pricing, may not feel the need to provide a formal institutional class.
A Luxembourg Sicav typically allows the manager to levy an initial sales charge of between 0-6%. As it is purely a sales charge, an institutional investor can get in and out at net asset value (NAV). There may be complications such as the generation of trail commissions, but these can be reinvested by the managers.
However, there is a more positive trend towards the institutional type of share. Philip Saunders at Guinness Flight, which has just recently entered the institutional arena, says, Traditionally, what happens is you simply discount the management fee, but it is certainly true that some companies have been successful at selling their funds on a more overtly institutional basis."
Jeremy Beswick at MFS International says his firm decided to offer institutional shares because there was a danger they would not be able to attract certain types of investor: "If we have a potential client with $10m we would happily set up a segregated institutional portfolio. But there are some investors with $9m or $10m who don't want a segregated account. So we set up an institutional class of share - with no charges and we shave a few points off the management fee. This facility is currently only available on MFS's Cayman Islands-domiciled funds, but will probably be available on its Luxembourg funds soon says Beswick. The minimum to set up is $1m "to put off the sort of people who should be using our retail mutual funds".
Francis Paxton at Daiwa Asset Management comments, "We are aware of exactly this quandary in the minds of institutional investors. Our response has been to create the first of a range of mutual funds for this class. The focus has been to recreate a segregated fee structure in a mutual fund, which reduces as the size of investments increases."
In any event, investors will not pay more than 0.90% pa all-in (including fund management, custody and administration). This reduces to 0.80% for investments greater than Yen100m ($700,000). The minimum investment is IR£100,000 ($140,000).
"This initial fund will invest only into Japanese equities, and will replicate our mainstream segregated investment style. We would be comfortable to manage a segregated fund of a minimum of US$10m, and our fees for this would be lower. However, we believe that there are few pooled funds with a more competitive fee structure," he says.
Morgan Stanley's Luxembourg umbrella has three share classes and has had great success in marketing the institutional share class. Their minimum is $2.5m. The Morgan Stanley example is interesting because these funds were set up as an institutional product that is now moving more to-wards the retail, with the launch of a no-load UK OEIC.
Northern Trust offers institutional portfolios for investments of £1m+, with charges depending on the size of the investment and the nature of the investments, but typically in the range for segregated or pooled institutional funds, ie no more than 70 basis points. Marketing vice president Daniel Sharp says, "All our funds run from London are operated on this basis. The biggest pension funds would obviously be able to ask for a segregated account, but we are regularly dealing with investments of less than £100m where the investors would be happy to allocate this to a pooled fund.
Farley Thomas at HSBC says, "Within our Luxembourg Sicav we don't have different classes of share. We attempt to alter the fee structure according the client, which might mean a discount or rebate of the initial fee. We also have a separate Luxembourg Sicav for institutions who want a pooled investment vehicle." HSBC is working on ways of simplifying the range of options.
Janice Hook at Invesco says the group does have an institutional ac-count within its Luxembourg um-brella, but this is purely for one client. With the amalgamation of GT, there is the possibility that this facility may be extended as GT has been one of the more active institutional share class managers, with its B class range. Its institutional class within the Dublin umbrella is available for a minimum of £250,000. Guinness Flight has followed suit and offers B shares on its Dublin umbrella which invests in China and India and soon-to-be-launched Eastern Europe. The minimum investment is £250,000, the funds are no-load and there is a 0.75% management fee. Nicholas-Applegate runs institutional portfolios within its pooled funds, and fees are negotiable, but there is no separate share class on offer.
Schroders offers an institutional unit trust range for investments of more than £100,000. There are 10 funds in the range. And Barclays Global Investors provides pooled funds solely for institutional investors.
In terms of the relative cost of institutional class shares, it may be that a $50m investor would be able to negotiate a better deal by way of a discount on a retail fund rather than opting for the institutional class. There's a lot of discounting going on, of course. As an example, the 1% fee on Rothschild's money funds is going to be substantially less than that if you're a wholesale buyer. But Rothschilds don't have an institutional share class. And while the appetite for pooled funds managed on a more aggressive retail-type basis is definitely increasing, cost is not the only issue.
The range of fund structures adds a further complication, particularly in relation to actual fund performance. Unless everyone is playing with same class of shares, the danger is you don't get a level playing field. The way investment returns are expressed clouds the picture still further. In the UK, for example, fund groups operate in a culture that states everything net of fees, but in the US they put more emphasis on the ability of the manager to add value."