The Skoda syndrome

The DWP report on workplace pension AMCs has put the spotlight back on active fund management charges. Paul Farrow finds as many voices against as for


At the turn of the millennium, Alan Miller was one of Britain’s best-known star fund managers. He plied his trade successfully as an active fund manager, initially at Jupiter and then at New Star where he ran the firm’s inaugural flagship fund – a fund, which was promoted as being about the man at the helm and his skilful ability to pick winning stocks.

After leaving New Star in 2007 he has now returned to the City.

Miller says: “It was great going to a gym class and being the only guy in the room, but once the credit crunch hit and bankers lost their jobs that soon changed. It became less fun.”

But Miller has turned his back on active fund management and is on a crusade to get investment houses to clean up their act on charges.

Miller says: “The odds are stacked against you. Very few fund managers will beat the market. Once you take into account the cost of dealing, annual fees and performance fees you will get a lower return.”

After a few years in the wilderness, he is back on the circuit. He now runs his own wealth management company, SCM Private, which only uses exchange-traded funds (ETFs). He believes that investors stand a better chance of holding on to their wealth if they use ETFs, with low charges one of the chief reasons. Miller claims that UK equity investors could be paying up to £5.8 billion a year in hidden charges that are not included in the Total Expense Ratio (TER) of a fund.

He wants TER to be scrapped and replaced with a new calculation that includes all charges.

In addition, Miller says he estimates that a typical fund manager will turn over around 57 per cent of their portfolio each year, which adds various costs amounting to a further 1 per cent a year, taking the true cost of investment to up to 3.8 per cent a year over a five-year period.

“These hidden charges act as a significant drag on performance, particularly when overall returns are low. The TER calculation excludes a host of additional costs and it’s time for a new calculation to be adopted that includes actual management fees and all other charges impacting on investors’ total returns,” says Miller.

“Fund managers’ fee scales, whether in the retail or the private client sector, tend to be highly complex, shielding the true cost of their services from investors and leaving many clients with a raw deal. The industry needs to show greater clarity and transparency over charges and these should be set at a much lower level.”

Today, Miller confesses to not owning any actively managed funds in his own portfolios either, although he still holds a smattering of shares.

The ETF market is in its relative infancy in the UK despite being £1trillion in size worldwide.

Though they have proved popular in the US for 401K plans, it might be a while yet before workplace pensions adopt ETFs as a matter of course. That said, last year Standard Life admitted it was considering including ETFs on GPP platforms as an alternative to the traditional tracker funds.