Evercore Pan Asset

When we set up Pan-Asset in 2007 we wanted to offer our clients a better deal. We realised that ultra high salaries, expensive offices and other luxury overheads enjoyed by some existing fund managers meant the industry had to charge relatively high fees, up front charges, dealing costs, and other commissions to pay the bills.We decided that one way to be able to offer an improved return for investors was to offer to cut the costs of investment management. This had to be done in a way, of course, which did not undermine investment performance compared to the average. Lower fees and charges were something tangible we could offer. The hope of better performance may or may not work out. Some of the most expensive managers who have to sell on implied promises of better results can produce the most disappointing outcomes.

The impact of higher fees can be very damaging. An investor in global equities achieving the return of the MSCI World index would have made practically nothing over the last ten years given the poor performance of the index. If they were paying 1% per annum in fees the effect would be to reduce this return to almost -9% over this period. If the fees and charges ran at 2.5% per annum the investor would have experienced a loss of more than one fifth of their starting capital. 

An investor in a balanced fund which produced a return equating 50% to the UK government All Stocks index and 50% to UK shares via the FTSE All Share index would be up just over 50% over ten years today before the effect of fees. After fees of 1% per annum this return would fall to 37%, and to a mere 18% for the 10 years if paying 2.5% per annum.

Source: Thomson Reuters, index returns to end July 2010 FTSE All Share, FTSE A British Govt All Stocks and MSCI World

Analysis showed that on average active management of individual share portfolios in the major markets lost investors money compared to buying an index tracker. The obvious cost for us to save was the cost of employing specialist analysts and managers to run segregated share portfolios.

Choosing low cost index tracking Exchange Traded Funds that track indices after all costs fairly accurately seems to us to offer the best chance of lower costs leading to better results. It also means in normal times you can deal less than in a portfolio of individual shares, though the last two years have not been normal. We aim to provide our individual clients with a competitive package on fees and charges, and would normally hope to provide better value management than the predecessor arrangement with another manager. Putting clients into cash for 2008 and then moving fully invested in 2009 entailed incurring worthwhile dealing costs. 

Independent Financial Advisers are under regulatory orders to change the way they remunerate themselves and report their fees and charges from 2012. They are coming round to see the advantage to them and their clients of lower cost more straightforward investment management services.  This will help them deliver a more professional service at realistic prices, whilst still enabling them to charge for all they do to know and help their clients.

The difference between a lower cost and a higher cost model can be important. The Telegraph in its recent survey suggested equity funds can entail an annual management charge of 1.5%, 1% of dealing costs within the managed equity fund and up to 1% of additional transaction costs and charges. There are sometimes higher entry and exit charges when an investor buys and sells the fund in the form of front-end commissions or fees. The models we have offered IFAs aim to cut these fees. Our annual management charge for providing an OEIC fund of ETFs is 0.4% and only 0.25% for tailor-made model portfolios for individual groups of IFAs, depending on the volume of money. The underlying ETFs used in the funds may have a very low true cost which we measure by the ‘tracking difference’; the difference in performance between the ETF and the index.  For example, the iShares S&P500 ETF has had an average annual tracking difference of only 0.05% since inception in 2002.  The tracking difference includes all the internal ETF costs including management and dealing and can be much lower than the stated TER, although some ETFs tracking complex or esoteric asset classes may have tracking differences which are higher.  We apply no front-end charges to the funds, and dealing costs may be lower than actively-managed share portfolios, as the core positions in main markets should not need to be altered very often in normal conditions. 

Saving investors 1% or 2% can if sustained over a period of years make a big difference to the outcome, and is especially important in an era of low income and low returns.