The advantages of active management

Written by: Quilter Cheviot Posted: 21/04/2020

BL67_QC_MichaelBullQuilter Cheviot Investment Director Michael Bull (pictured) explains how the business delivers the advantages of active management to its clients through a well-resourced fund research team that can improve the probability of investing in funds that outperform

As a research-orientated wealth manager, we believe strongly in the value of active management. Sustained over time, the outperformance from active management can significantly improve returns and overall client results. 

In recent years, however, the value of active management has increasingly come into question. Academic studies have demonstrated the difficulty of outperforming the market, particularly after taking fees into account. 

To help provide our clients with the advantages of active management, we focus on two areas we believe are critical to delivering good client outcomes. 

First, we identify those managers who have a robust investment process that allows them to repeatedly outperform. Second, we negotiate proactively on fees with our recommended managers, allowing our clients to access the best opportunities at some of the lowest costs in the industry.

All else being equal, you have a better chance of outperforming when the cost of your active management is low.

Our emphasis on fees

When negotiating with third-party managers, we use the combined buying power of Quilter Cheviot and Quilter Investors to secure the best possible fees for our clients, and we have had major success in this regard. 

We have secured significant reductions in fees from Schroders, Baillie Gifford and AllianceBernstein, among others. We have led the way in securing fee reductions, both in comparison with other wealth managers and the broader asset management industry. 

Our clients are now paying significantly lower fees, with the ongoing charges figure of our balanced model having fallen to 0.56% over the past year. 

This and other reductions should make a meaningful difference to client returns over the medium to long term and we will continue to work to secure further reductions. 

BL67_QC_illoHow do we achieve fee reductions?

We aim to negotiate and secure fee reductions on a regular basis, proactively engaging with management and maintaining an open dialogue with managers of all buy-rated funds. 

Where appropriate, we will also provide the initial investment to help start a fund. Seed capital is highly valued by third-party managers and our ability to help launch funds has helped us to secure several preferential fee arrangements. 

Seeding funding in action – Baillie Gifford Japan Income Growth Fund

Baillie Gifford’s Japan Income Growth Fund is a good example of how seed capital can help us to provide attractive investment opportunities for clients. 

We were interested in finding a Japanese equity income fund, with many Japanese companies paying an attractive and growing dividend, especially with corporate governance reforms encouraging them to return cash to shareholders. 

Importantly, Japanese companies often have very conservative balance sheets, with their dividends well covered by earnings. Existing funds within this space did not have enough of an income focus, were limited in their investment universe or were too expensive.

After speaking to several managers, we realised that Baillie Gifford was interested in launching a product that filled the investment gap we had identified. It proposed combining its growth style of investing with an income overlay, given that many of the companies it already covered in its growth strategy also paid an attractive dividend.

We were familiar with the firm’s investment process, with this having produced strong outperformance for its Japanese growth strategy. 

Our offer of seed funding allowed Baillie Gifford a simple way to develop the product, knowing that it would be tapping into existing demand. We were able to shape the development of the investment strategy in return. 

We encouraged Baillie Gifford to launch the strategy as an open-ended fund, which allowed us to use the fund for a wider range of our clients. 

The resulting strategy, the Baillie Gifford Japanese Income Growth Fund, has outperformed by around 5% per annum over its first three years. Quilter Cheviot clients benefit from an exclusive share class that has an annual management charge of 0.42%. 

Future fee reductions

Given the pressure on active managers to reduce fees, we believe that there is scope to secure further fee reductions for our clients in future. We are in advanced negotiations to reduce fees with several other active managers, and we will work to continue passing on the savings to our clients. This includes gaining access to super-institutional share classes. 

We are strong believers in the value of active management, particularly when combined with a well-resourced fund research team that can improve the probability of investing in funds that outperform. 

By maintaining pressure on fees, we can lower the hurdle to outperformance, and continue to advance the best interests of our clients. 

For more information, contact Michael Bull at Quilter Cheviot 

• This advertising feature was first published in the April/May 2020 edition of Businesslife magazine

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