The Times - UK (2020-10-17)

the times | Saturday October 17 2020 1GM 63

Money

They hold £1.3trn of our money, but fund giants won’t cut fees

F

und managers whose profits from fees are rapidly increasing as their funds swell are under pressure to reduce costs for investors. UK asset managers made profits of 36 per cent in June, down from the 37 per cent in 2015 when they were overseeing £930 billion of customers’ money — today it’s £1.31 trillion. Alan Miller, a wealth manager and campaigner for transparency in the investment industry, said: “There is little evidence that many actively managed funds are passing back eco- nomies of scale to their consumers because their charges overall are simi- lar to five years ago. There is little price competition and the FCA has yet to regulate this apparent cartel properly.”

He looked at the ten largest UK- based actively managed funds, investment trusts and exchange-traded funds, comparing charges with 2015. The worst performers were the giant actively managed funds. Over the past five years they had trimmed average annual charges from 0.86 per cent to 0.84 per cent. Terry Smith’s £21.5 billion Fundsmith Equity fund, the biggest in the UK, cut its ongoing charge from 0.97 per cent to 0.95 per cent. Even more niggardly was the £3.6 billion Fidelity Asia fund, which de- creased its ongoing charge from 0.95 per cent to 0.94 per cent. The £4.2 billion Artemis Income and £1.3 billion Artemis Global Income funds raised their charges from 0.79 per

cent to 0.81 per cent and 0.82 per cent to 0.85 per cent respectively. Bucking the trend with sizeable cuts in charges were Baillie Gifford’s £4.9 billion American fund, which cut fees 24 per cent from 0.67 per cent to 0.51 per cent, and Lindsell Train’s £7.9 billion Global Equity fund, which cut charges from 0.57 per cent to 0.50 per cent. Investment trusts managed more substantial reductions with the ten largest reducing their annual charge by an average of 12 per cent to 0.73 per cent. Scottish Mortgage, the biggest trust at £13.5 billion, sliced 25 per cent off its annual charge to 0.36 per cent. The biggest cut came from the giant exchange-traded funds (ETFs), which

track a stock market index, and chopped 27 per cent off fees, bringing the average charge to 0.11 per cent. Fundsmith said: “We focus on the total cost of investment, which includes transaction costs and we keep these to a minimum. However, we would cau- tion against becoming obsessed with charges to such an extent that you lose focus on the performance of funds.” Fidelity said: “Fees on Fidelity Asian have reduced from 0.99 per cent to 0.94 per cent over the past five years as assets have risen. The fund charge is also 0.06 percentage points lower than the average in its peer group and the fund has outperformed its benchmark over one, three and five years.” Mark Atherton

Alan Miller, with his wife Gina, wants the FCA to launch a full investigation

I

n 1984 Tim Steer was working as a sound engineer with music stars including Diana Ross, Pink Floyd and the Jam. He claims to have helped Bono from U2 to hone his microphone technique. Yet he gave it up to become a chartered accountant before moving on to be an analyst at HSBC James Capel and then at Merrill Lynch focusing on small and medium- sized companies. One of his special interests was the forensic analysis of company accounts, where he looked as much for signs of weakness in companies to avoid as for positive signs that would indicate a buy. It led him in to a career as a fund manager, first at New Star Asset Manage- ment, which collapsed in 2009, and then at Artemis, where he ran the Artemis UK Growth fund and the Artemis Pan-European fund, before another career switch in 2016 to become an author. Steer lives in West Sussex with his wife Andrea and divides his time between writing, broadcasting and giv- ing presentations to investment managers and accountants about how to spot that a stock is in trouble. His first rule is to watch for bad debts. Anyone can lend money; it’s getting it back that is difficult — as investors in the Northern Rock bank based in New- castle could tell you. A look at the bank’s balance sheet in- dicated that it had not provided enough for bad debts. Steer said: “It was the same a year later with the doorstep len- der Cattles. In 2007 Cattles grew its loan book with new customers by nearly 40 per cent, but the bad debt provision, expressed as a percentage of loans, actually fell.” More recently Provident Financial and Amigo Holdings have suffered catastrophic falls in their share prices as bad debts have mounted. Steer explained: “With specialist lenders, it’s the big numbers that matter, and that is the loan book, whose value is entirely determined by the bad debt provision, which more often than not is based on the too optimistic premise that the Great British public will pay all its debts. There will be fresh worries about borrowers’ ability to

pay off debts in our new Covid world.” Steer’s second tip is to beware when the quality of a company’s assets gets steadily poorer, such as Carillion. Steer said: “When a company grows its sales, it is entirely reasonable to expect that other numbers like assets and liabilities grow at more or less the same rate. This

was not the case at Carillion as poor- quality, subjectively valued assets, such as amounts due on construction con- tracts, which rely on estimated profits, doubled over time when sales hardly grew at all. The willingness of develop- ers to fund big projects in a changing Covid environment will be tested, so

provisions will need to be adequate.” Having lots of inventory also matters. Patisserie Valerie, which went bust in 2019, had stock that was on average 81 days old — not ideal when you’re selling cream cakes. High valuations of inventory are generally a worry as there may be

obsolescence, or worse in the case of a cake shop. Investors should also beware of related-party transactions — arrange- ments made between two parties that are joined by a pre-existing business re- lationship. In other words, deals between mates. These have rarely been an issue in UK-listed companies until NMC Healthcare. The last annual report showed that NMC bought $130 million of healthcare supplies from a related party well before it went bust. “This was a transaction that should have been too cosy for comfort for investors,” said Steer. He warns about being starry-eyed with household names, such as fund managers like Neil Woodford whose style of investing changed so that he no longer picked big companies that paid dividends after he set up Woodford In- vestment Management. Steer said: “When he set up on his own he did a U-turn and bought small companies that paid no dividends at all. In fact, it was worse than that. Many of the companies he bought not only did not pay a dividend but actually required additional finance to sur- vive. It was therefore no surprise that he failed because he was adopting a completely different investment strategy from the one that had achieved so much for him in the past. His fund factsheets told us all this, but only some investors bothered to read them.” Steer’s final warning for investors is to check the numbers that companies report even more carefully in these Covid times and to watch out for which profit figure they choose to quote. He said: “There will be a tendency for companies to report their underlying trad- ing, excluding the effects of Covid, which means massive potential for mis- representation. Also, there will be large Covid exceptional costs which will no doubt include costs that may have nothing to do with the pandemic at all.” He added: “The good news, if there is any, for investors, but perhaps not for employees, is that because of Covid, companies will no longer defer the difficult decisions they have been agonising about for ages. Companies will make the tough decisions they ought to have probably made years ago.”

A day in the life

Tim Steer’s day starts at 6am when his radio wakes him up with the Today programme. After the business news the 65-year-old goes to the gym in his house for some stretching. Breakfast consists of a bowl of spelt flakes from Sharpham Park, a company owned by Roger Saul, the man who used to own Mulberry. The cereal is washed down with oat milk. If the weather permits, Steer regularly spends part of the morning cycling in the South Downs or around Chichester Harbour. While

out he’ll stop at the old well in East Marden village, watch the world go by for 15 minutes and check the markets. Then it’s back home for a light salad with his wife, Andrea, a retired accountant. They have a son who is also an accountant. After lunch there may be bits of maintenance to do on their largely wooden house or in the extensive garden which has a wildflower meadow. Then he’ll do some work. He is currently preparing presentations for an

accountancy firm, usually about spotting company failures. Later in the afternoon he may have time to take his 1970 Chevy Chevelle for a spin. He’s also a keen sailor, with a boat moored in Chichester harbour, so some days he and a friend go sailing. He and Andrea take turns making dinner, and he’ll

watch football, rugby or cricket. He supports West Ham United and loves the British and Irish Lions and used to coach the Rosslyn Park under-19 XV. When the Covid-19 pandemic is finally over he looks forward to watching cricket at Lords. “To be allowed to do this again will mean a life worth living has resumed,” he said.

Tim Steer, who has a boat and a Chevy Chevelle, says he knows how to spot companies that are heading for a crash

Six ways to spot a failing company

A fund manager who

made his fortune by

scouring the details of

firms’ finances tells

Mark Atherton his

strategy for avoiding

a bad investment

Steer’s top tips

6 Check the numbers 6 Watch for bad debts 6 Beware of a drop in asset quality 6 Inventory matters 6 Stay alert for signs of “deals between mates” 6 Don’t get starry-eyed

m s lo d v o c a M o

ly v h c s a H b

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The Times - UK (2020-10-17)

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