Where Do We Start?
There is a famous Chinese proverb; “muddy waters make it easy to catch fish”. In the original tale, the muddiness of the water signifies a confusing or chaotic environment, where the opportunistic behaviour of an angler allows them to catch more fish. In the world of asset management, who are the fish, the anglers and what is the water? In this context, the angler is a mispriced asset manager, who benefits, often unknowingly, from the lack of good quality fee and costs data, when pricing for their clients. Although the industry has taken great strides to improve reporting standards, such as on risk and return parameters, for the vast majority of mandates and share classes, there is no single comprehensive source for fee structures. The result of this is the classical economic dilemma of asymmetric information. This is where one side of the bargain has more information than the other, leading to mispriced goods, in this case, funds. This information barrier limits the ability of asset owners, such as pension schemes, to negotiate fee levels for varying mandates, as the data on what the industry currently charges is too opaque. Furthermore, this issue is experienced not just by asset owners but also by asset managers who want to price themselves correctly. Through our research, we have found asset managers who openly advertise what they claim are market-leading rates but are, in fact, quite average, being outcompeted by similar-sized rivals. This article, therefore, explains why improved transparency is so vital, and how it can benefit both sides.
Our solution is simple: a service that filters the waters of asset management, allowing asset owners to benchmark fees paid to similar funds of the same asset class and enabling asset managers to compare their fees to market rivals. At the same time, this allows asset managers to better price their funds in a highly nuanced marketplace. The result of this is greater market efficiency, improved competitiveness of the markets which adopt it, merit-based performance and larger pension pots for savers. Since its inception in January 2019, ClearGlass has collected data from over 18,000 mandates across 850 schemes, collating the single most extensive and granular set of data on which to base these benchmarks.
Market Efficiency
When we look to buy a car, we have a wealth of information to draw our price expectations from. We use popular used car sites, official car retail pages, and distribution outlets. Essentially, we know the price of a car to a high degree of accuracy before we go in to sign the papers. In asset management, participants may go into multi-hundred million-pound fund negotiations not knowing if they will come out paying 40bps (0.4%) of AUM in fees, or 60bps (0.6%), a difference which could cost millions. This difference in price, compared to the median, benefits the inefficient asset manager, who charges fees above what they would in an efficient market, either knowingly or unknowingly. Therefore, by benchmarking fees and simplifying the data, negotiators go into meetings fully equipped with the knowledge of a fair price. Efficient asset managers receive increased funds, asset owners improve their margins, and their fundholders have a better retirement, and effective managers replace inefficient ones.
Improved Industry Competitiveness
The above argument lays a clear foundation for this: efficient markets are competitive markets, and competitive markets perform better internationally, drive investment and attract talent. Therefore, such a service is not just of collective use to the industry but also to policymakers who see the benefit of having an internationally competitive financial marketplace, generating a range of economic benefits. Through increased economic output from the above factors, a lower level of taxation is required to generate the same income, leading to scope for policymakers to decrease tax rates. The resulting influx of capital from more competitively priced mandates, lower taxation and an efficient market lead to a booming market for education, housing, office space and retail, as financial workers move to the area and spend their income. It solidifies the region as a reputable and transparent market to invest in more widely, leading to spillover effects into other industries. Consistent improvements in transparency compound over the long run to create significant areas of specialism, erecting barriers to entry that can secure a nation’s market-leading position for generations to come.
Merit-Based Performance
As we have seen, some asset managers, many of whom we are aware of, charge significantly above-market rates for funds in the same asset class. We do not do our daily shopping by walking into a store with no price tags. We would surely leave swiftly if ever we were to find such an elusive place. It is time for the asset management industry to modernise and shake off the shackles of ambiguity by embracing a new system where asset managers are rewarded for what they deliver. For example, we have found one medium-sized asset manager operating some of the best value funds in a specific asset class, but not getting the recognition they deserve. One explanation for this is that they compete with firms that loudly claim to be the most cost-effective in the industry when the data shows otherwise. Transparency, therefore, would allow asset managers to quickly grow and compete with the established order, which is sure to ruffle some feathers.
Larger Pension Pots For Savers
The ultimate effect of all the above is close to all of us, as we likely all hold a pension fund of some description, and billions more around the world do too. In a world that is set to experience decade-high levels of inflation and record public debt, savers are facing more insecurity than ever. We owe it to them as an industry to create an ecosystem that works effectively and efficiently. By shifting our focus to managers who offer value for money, pension funds can keep more of their mandate’s share of net returns and compound these benefits over time to give savers a better retirement. For example, for a £100m fund, a 1bps (0.01%) reduction leads to £10K per year in savings, which is only further compounded over time due to fund growth. Using this example, we can only begin to extrapolate for funds that overcharge by 10, 20 and even 30bps over a 30 year investment period. This is ultimately why we come to work, to maintain this apparatus, and make a meaningful contribution – even if it is well shrouded through layers of muddy, opaque water.
Therefore, by working towards a more transparent market where fees are available to asset owners and managers, everyone benefits. The best asset managers are empowered to grow, savers can live more comfortably, the domestic market is made more competitive and society as a whole benefit.