Schroders: UK regulator adds pressure for lower fees, praises SA-managed disruptor Fundhouse

Schroders, one of the world’s oldest financial institutions, has been taking a growing interest in South Africa in recent years. It has received strong support from SA investors for four offshore funds and a property company floated on the JSE.

The SA responsibility falls within the portfolio of Schroders director Robin Stoakley. I met with him this week and the result is this wide-ranging interview which includes comment on the latest UK regulator’s report into the asset management sector which is being pressurised to further cut its fees – and what happens in the UK usually follows in SA.

You’ll also pick up a honourable mention of Fundhouse, the SA-managed, London-based investment ratings business whose disruptive model got a huge vote of confidence in the UK regulator’s report. – Alec Hogg

Robin, for the South Africans who perhaps have never heard of Schroders, it’s been around a long time.

Yes, I think we’re about 210 years old now. We were formed, I think, just after the Battle of Trafalgar, so it gives you an idea of the longevity. We’re an independent London listed fund manager. The largest independent manager in Europe, running something like 375 billion Stirling of assets across the world.

I think the biggest differentiating factor for us is, whilst we’re independent just under 50% of the company is owned by the Schroder family and the 6th generation of Schroders are still active in the business. So, whilst we are a PLC, we very much have the mindset and approach and the conservative, with a small ‘c’ nature of a private family business, albeit it one that is rather large in asset management terms.

Robin_Stoakley_Schroders

Robin Stoakley, Schroders

Your South African relationship hasn’t been going for that long, well certainly not in the fund management area. What triggered it?

Well, I was asked to look at whether there was an opportunity to develop a business in South Africa, so I spent some time (2009/2010) down there and rapidly reached the conclusion that there was certainly an opportunity for a fund manager, like Schroders, to develop a good business, primarily in the offshore market in South Africa.

It’s interesting that we have noticed over the years that there have been relatively few international managers, who have put a serious amount of effort in developing a South African business.

The market appears to be dominated by domestic managers. The standard of fund management, I would say, is very good.

I would also add, by the way, in our dealings with financial advisors the impression we’ve formed, which has been repeatedly confirmed is the quality of advice and the advisor market in South Africa is one that we think is very high. For us, we felt that it was a market that we could certainly do business in. That’s been subsequently confirmed to us.

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We have a number of funds that are FSB approved, as offshore investments, those are global equity funds. We have more in the pipeline. We have a strong relationship with Absa, where we are Absa’s global fund management partner and we offer a number of products through the Absa partnership.

Thirdly, we have an interest in a listed, physical property fund, the Continental European Property Fund, that’s co-listed on the Johannesburg and the London Stock Exchanges.

That’s quite a big portfolio. Just go into the Absa relationship. How did that come about?

Absa, at the time, was majority owned by Barclays. Obviously, Barclays are gradually divesting a lot of their Absa holding but, at the time, Absa was looking for an active global equity partner and Schroders has a long, and deep relationship with Barclays in the UK.

Certainly, Absa were using Barclays for a lot of their research and, as a consequence, it was quite natural that Barclays would pass Absa across to have a look at Schroders, and that’s how the relationship developed.

We have four feeder funds, ZAR feeder funds, the onshore funds that Absa offers, through their investment distribution that feed into Schroder funds, and there’ll be more coming and it’s been a very, strong relationship for us. We’re very pleased with them.

Those feeder funds mean you can invest in Rand’s and actually get a Stirling exposure, or Dollar or Euro.

Absolutely, they are onshore feeder funds, so they can be used as part of the onshore rather than the offshore portfolio but they’re global funds, so yes, they’re giving investors exposure to global, which is predominantly US Dollar.

There’s lots about costs nowadays and certainly the early days, post 1994, South Africans really paid up to get their money offshore. What are the cost profiles looking like in your funds and in the market, generally, for offshore investing?

Well, we are offering our funds at what we believe to be a competitive rate. Typically, a total expense ratio of around about 90:100 basis points for active global equity.

That’s under 1%?

Under 1%. Obviously, there are other charges that investors will pay, advisor charges, platform chargers, and so on and so forth, but those would be comparable to fund charges that are paid in most parts of the world.

From what we see they’re quite competitive in a South African context. In fact, our biggest investment fund in South Africa, which is the Schroders QEP Global Core, is actually offered at around 40 basis points. I think that seemed to be quite a competitive product.

Are they offered only through intermediaries?

Yes.

So, you can’t go online and make your investment and take full advantage of the 40 basis points?

No, we are a business, we’re a B2B (business-to-business), and we transact through intermediaries. Whether those intermediaries happen to be advisors, discretionary managers, a retail bank like Absa, or indeed, as is the case in the UK, quite a lot of non-advised platforms. We call them ‘execution only’ that tend to offer mutual funds at quite a competitive price.

To dwell a little on your property fund. It’s substantial now, about £150m, in Rand’s that’s into the billions. What was the incentive or what was the idea behind that?

Well, we are aware that the South African market has a significant interest in international investment. One of the advantages of listing a fund on the JSE, is that it’s not taking up an offshore allowance. Investors have the ability to get international exposure, without forming part of their 30% non-South African exposure.

For us or for investors, our advisors, PSG, informed us that that was going to be quite a positive move for investors. We know that the South African market has a great interest in offshore.

Our experience has been through a property securities fund that South African investors have a great interest in international property. For example, we know that South Africans are quite big investors in the London property market.

We felt for some time, this was back in 2014, when we launched the fund, (the investment company). We thought there was a great opportunity in Continental European physically property in the great cities of Continental Europe, Paris, Frankfurt, Berlin, etcetera. We felt that certainly relative to, for example London, acquiring good quality real estate in those cities was actually very competitive on a value basis, compared to London.

We also felt that the Euro was going to continue to be seen as a relative safe haven currency for investors, particularly international investors.

So, as a consequence when we offered the fund, which is quite rare. There are very few pure Continental European physical investment opportunities.

We felt it would get a reasonably good showing, so we launched the fund at the beginning of 2015, and I was very pleased that we actually took something like 75 million Stirling from UK investors, and about the same from South African, primarily institutional investors, and that’s worked out very well. We’ve subsequently come back to the market and raised another 20 million – partly from South Africa and partly from London.

That’s an understatement, worked out well. If they had put the money into the London market or into Stirling things would look rather bleak, but dodged a bit of a bullet over Brexit.

Yes, the Brexit result was unexpected and obviously, Stirling has weakened quite significantly since then. Having said that, markets have been quite good. If you look at the London market, post Brexit, they’ve actually done quite well.

London_residential_properties

A pedestrian talks on her mobile telephone as she walks past residential properties on Victoria Road in the Borough of Kensington and Chelsea, in London, (UK Photographer: Luke MacGregor, Bloomberg)

The 20 million that you raised in addition, is that the beginning of many more fund-raising exercises in the future? Are you looking to expand this portfolio quite aggressively?

Aggressively is not a term we tend to use at Schroders, but we will certainly look to grow the portfolio over time, and when we find good investments, we will come to the market, both in London and in Johannesburg. To ascertain whether there’s investment demand to partner with us to grow the fund, yes.

Looking more specifically at the UK. There’s been a report out from the FCA, the Regulatory Body, which has had some pretty harsh suggestions about the way that the financial services are operating in. How are you reading this kind of information and the impact it might have?

Yeah sure, let’s be clear. This was a 200-page interim consultancy report. The final report won’t come out until next year. It was published last Friday, so I think people in the industry are busily digesting it.

The FCA has undertaken a program of looking to improve the way financial services and retail investments are offered into the marketplace, and that started back in 2006, and culminated with the RDR, which came in at the beginning of 2013. I think the Asset Management Competition Study, which is what you’re referring to, is a natural evolution of that.

The principles behind these moves are to improve the retail experience for particularly retail but not withstanding institutions. To improve the retail experience for investors and, as a consequence, first of all we welcome that. We welcome the RDR. The RDR had an objective of significantly improving the way retail investments are distributed in the UK.

Has it done so?

It absolutely has achieved that. It hasn’t been without its casualties but from where we sit that’s been a good thing and the professionalism of the marketplace now, and the transparency of costs that the investor can see and sign up to, is much greater. That is absolutely to be applauded.

You are aware that the RDR in South Africa is now gaining momentum and there’s still quite a lot of concerns over it but I guess your message would be ‘don’t panic.’

My message would be to the end consumer, RDR is a good thing. Certainly, the experience in the UK, RDR has been a good thing (on balance), and to the advisor, those advisors, who are adopting a professional fee-based approach to providing services for customers, in the same way than an accountancy firm or a law firm may, I think will absolutely embrace, thrive, and prosper after RDR.

So, the professionals should welcome it, but getting back to the FCA report.

Yes, I mean, the FCA report has basically said that there’s a lot of active fund management out there that doesn’t deliver sufficient value, once charges are taken into account and that is absolutely true.

If you look at the marketplace you will see that there are always a significant number of funds, with large pools of investor’s money that are under performing and are serial underperformers. I think it’s about time this issue was addressed. The FCA is absolutely addressing or starting to address that issue and that’s a good thing.

But how do you address something like that? You have a very keen marketing team, who try to put their company in the right light. It’s very difficult for consumers to be able to differentiate between the fact and the fiction.

Well it’s interesting. One of the consequences of RDR, in the UK, has been a significant decline in the costs for investors of passive product. Typically, 10 years ago, investors were paying 100 or maybe more basis points, 1% for a passive product in the UK.

Now, as a retail investor, you can invest a thousand Pounds in a passive product, investing in the UK, or US, or global and you’ll probably pay 6 or 7 basis points, 1/15th of 1% but what you haven’t seen is you haven’t seen the same level of competition, in terms of price affecting active funds.

I think that is inevitable that you will see better value for money in active funds in the UK. I would be expecting the price of active fund management to be moving towards US levels, which is somewhere around the 50 to 60 basis point level.

Is that going to happen in countries like South Africa, where RDR is coming in, which may well be followed by a Competition Review? Quite possibly but that is the world we live in now, and I think the world where a retail investor has to pay all in, 300 basis points per annum, before they start actually getting a value add return. Those days are going and they should be going.

At some point in time it was over 500 basis points, so we have made a lot of progress.

Well that’s frankly ridiculous. If you look at the long term return on equities, which is typically 700 basis points or 750 basis points. To take up 60% to 70% of that in charges is just, in my view, isn’t tenable.

As a rule of…I think if you’re able to add value as an investor then I think the fund management proportion of that value add should be somewhere around the 20% to 25% mark, not 50% or 75%.

In my view, in terms of the take, but I think this is a real wake up call for a lot of active managers and I think it’s important for what this will do, this will refocus and redouble active manager’s efforts.

To ensure that they’re doing the best possible job for their customers all the time, and they’ve got the best, possible resources in place to do that and their products are distributed in a way that is absolutely clear, fair, and not misleading, in terms of what they always say ‘we intend to do.’

One thing I can guarantee is every active fund manager will underperform from time-to-time. We have certain products. As a house, we have a very strong, deep value franchise, which we sell quite successfully, and distribute quite successfully in South Africa.

It’s very important to educate investors about the benefits of value investing and the audience will be very familiar with them. But over the long-term it seems to me one of the best ways to build a top-quality return profile.

However, you’ve got to accept that there will be periods, often years where you are going to see a significant underperformance, as value is out of favour for whatever reason, and it’s absolutely imperative that we, as an industry, from the advisor all the way through to the fund manager, are clearly informing investors of the type of return profiles.

And the risks they undertake in that kind of strategy. For me, I personally feel that this is long overdue and a welcome move to make sure the asset management industry, and a particularly active asset management industry works harder for its investors. Let’s face it, we’re a very profitable industry globally, and therefore we should be ensuring that our investors share the fruits of that as well.

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If you were invested in a listed asset management company, given what is happening now. I guess you’d be having another very close look at whether you should stick with it.

I think you should. For me, in terms of the attractiveness of listed asset management companies is, without question still there but I think one needs to make sure that one invests in a company that’s well diversified. Both in terms of geography, in terms of customer profile, but also in terms of product offering and one of the things that we at Schroders has been absolutely key to how we develop our business, is to make sure we are diversified.

We’re operating in 33 countries around the world. We have just under 40 investment product themes, very broad ones. Covering equities, bonds, alternatives and real assets, and to ensure that our customer base is diversified from institutions, sovereign wealth funds, all the way through to retail investors and to manage private client assets. Diversification for me, is the key.

So, there’s be a lot of squeeze on the profit margins, but as long as you diversify you’ll remain, you’ll still be around, you can continue to grow assets and maybe the volumes will bail you out.

Well, I don’t think we need to be bailed out.

Well, bail you out considering the current level of profitability that asset management firms are having.

Yes, but I think if you look at the general backdrop and I’m obviously speaking to a degree, with a UK pass, but I think it’s through many parts of the world. There has been a significant reliance over the years on state support in retirement. I think there are 2 or 3 elements here.

The first is that a lot of governance and a lot of states can no longer afford to support individuals in the way that they feel they should be supported in retirement. The second point is that longevity for individuals, people are living a lot longer. One in five people in the UK, aged 35 now, will live to 100 or beyond. Average life expectancy for someone born today in the UK is reckoned to be north of 110 or 115 years.

Now, that means a very long retirement. Now obviously, two consequences. First of all, people are going to have to work longer. In the UK, the retirement age is gradually going up. I can see people working well into their mid till late 70’s, which is something you didn’t see years ago. People weren’t living when they got to their mid-70’s to 80’s.

The second thing is they’ll have 30 to 40 years in retirement, and people have to understand now and for me this is true, and in most places of the world they have to understand that they must make provision for that retirement and they must make it themselves, and they just start making it very early in their working careers.

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