Daniel Godfrey, CEO,Investment Management Association (UK)
“I want to focus on the importance of our industry in a new expression of our purpose, which underlines the inherent value of our work”
If you stop and ask most people in the street, they’ll have little idea what investment management is, how pensions work or what asset managers do. In the UK historically, there were good reasons for this. Employees who were members of company schemes would tend to see the ‘pension promise’ that was inherent in the predominant defined benefit (DB) approach. Those that saved in personal pensions would invariably be using products run by the life industry, associated with smoothing mechanisms and guarantees.
Over the last decade, the world has changed significantly. Most visibly, we have seen increasing pressure on DB schemes, with closures to new members and future accrual. At the same time, there has been a further growth in unit-linked business in the insurance-operated long-term savings market. Both trends signify a shift towards a form of retirement saving whose outcome is primarily determined by individual contribution levels and investment performance.
This significantly changes the relationship between the individual and their pension. It also changes the profile of the investment management industry. Individuals are increasingly exposed to long-term investment products that will turn into a retirement income. They bear an increasing amount of the risk, and the performance of the firms responsible for managing the money is likely to be far more visible, even if investment managers remain highly intermediated.
As the new CEO of the Investment Management Association (IMA), I want to focus on the importance of our industry in a new expression of our purpose, which underlines the inherent value of our work and which will drive everything we do in the future. Our purpose is to ensure that investment managers are in the best possible position to build people’s resilience to financial adversity, to help them achieve their financial aspirations and to enable them to maintain a decent standard of living as they grow older.
By focusing on our purpose, we’ll concentrate on three long-term goals that will enable the industry to fulfil its potential to make a real and positive difference to people’s lives:
• The first is to drive excellent industry standards and operating practices.
• The second is to build the best possible operating environment so that investment managers can concentrate on doing a great job. This means working with regulators and politicians to build regulatory regimes that are effective, trusted to protect clients, simple to follow and cost effective.
• Finally, we have to build a trusted industry. There have been so many horror stories around pensions and investments in the media that we have a tough job regaining trust. Investment managers, consultants, platforms and other intermediaries will all need to demonstrate that they are delivering value for the fees that they command, and that they are contributing to well-governed and member focused pension arrangements.
So what does this mean in practice? One area in particular that we can advance as investment managers is improving clarity around the charges that we make for the products that we provide, and the costs that we incur in delivering those products, whether in the retail or institutional market. Where better to start than with the search for a way to explain fund costs and their impact on performance in a way that helps investors, rather than leaving them scratching their heads?
I have a proposition to put to a broad range of stakeholders, including asset managers, clients, consultants/advisers, the media and consumer representatives. I want us to work together to build a simple solution and to develop a methodology that makes customers better informed without needing a PhD in fund accounting. Let’s see if we can deal with historic costs in a way that gives our investors a simple, but robust, measure of the real costs incurred and in the context of the real performance achieved.
The idea I want to discuss takes, as its starting point, the fact that for any fund’s accounting year, we know exactly how a unit has performed and we also know every penny that has been spent by the fund (or allocated to a share class). This could be annual management charges, administration expenses, audit fees, performance fees, dealing commissions, stamp duty, foreign exchange dealing costs or anything else – it’s all been spent and it’s all been recorded.
The proposition is that if we calculate the average number of units in issue on a daily basis over the year and divide that into the total costs, will we get a reasonably robust approximation of the costs incurred by a unit held over the full year.
This would allow a simple statement of costs and performance to be given to investors. For example, for a fund whose accounting year was the same as the calendar year. we would be able to tell an investor who had bought (and maybe sold) some units during the year:
• You held 3,456,000 units on January 1, 2012 with a value of £4,320,000. On December 31, 2012, you held 5,140,000 units with a value of £6,939,000.
• For a unit held throughout the whole year, the price went from £1.25 to £1.35, a rise of 8%. The total costs for a unit held throughout the year were approximately 2.5p per unit. The costs were 1.92% of the average unit price of £1.30 (thanks to Ian Gorham of Hargreaves Lansdown for coming up with this).
Of course, nothing is easy. We may hit bumps along the way, which could throw up anomalies where this method produces misleading results. But if and when we hit these bumps, we should seek to find adjustment factors that we can all agree on rather than saying “it can’t be done” and giving up.
If we can get to the right place, this simple historic cost number may be all that the vast majority of clients ever want to see. But for those clients who want to see the breakdown, they should be able to drill down to the individual line items to see approximate values within the total. And for some costs, perhaps a third layer should be made available – for example the dealing commissions spent by the fund broken down into execution cost and amounts that have been allocated to brokers in respect of research services received by managers.
The historic cost proposition discussed here could be a big step in the right direction, presenting, as it does, performance against cost in the same place and in a simple format. But ultimately it’s a superficial value statement and doesn’t give the client a clear steer as to whether they should be pleased or disappointed with the outcome.
I think there may be ways that we can work towards more comprehensive value metrics, but one step at a time.