Woodford absorbs research costs within AMC

Neil Woodford, Woodford IMWoodford Investment Management has announced that it will absorb research costs within the annual management charge of its £8.4bn Equity Income fund and will provide a monthly disclosure of transactional costs.

The move is being hailed as a step forward in fund charge transparency that will put pressure on other asset managers to more closely align investors’ interests with their own.

Research costs represented 0.02 per cent of the fund’s net assets in 2015, along with a cost of 0.03 per cent for transaction taxes, 0.02 per cent for execution costs and 0.02 for spreads. Fund manager Neil Woodford is known for being a long-term investor who typically has low portfolio turnover. Funds adopting a more active approach to buying and selling stocks are likely to be levying higher research and transaction costs, and could find the disclosure and absorbing of these costs more difficult.

The Pensions Institute has called for investment managers to bear all transaction costs within their AMC, arguing that this incentivises managers to manage these costs effectively.

The FCA is currently consulting on how to improve fund management charge transparency.

Woodford IM CEO Craig Newman says: “Dealing commissions for fund investors have historically had two components: the cost of researching the investment decision and the cost of executing it. In recent years, regulation has increasingly sought to separate the two. Fund managers consume research from various sources (economists, investment strategists, analysts) and in various forms (face-to-face meetings, telephone conversations, stock specific and bespoke research reports). This research helps to inform and shape the overall investment strategy as well as investment decisions at the stock specific level.

“From 1 April, research costs are being paid by Woodford, rather than by the fund. Importantly, we are not increasing our fees to cover this additional cost. Investors are, in effect therefore, getting a price cut, which will immediately benefit the future performance of the fund.

In 2015, research costs represented a cost of 0.02 per cent of the fund’s net asset value to fund investors, based on the fund’s average size during the year. This number will slowly reduce over the next 12 months, and will disappear completely by April 2017.”

Hargreaves Lansdown senior analyst Laith Khalaf says: “The disclosure of transactional costs lays down the gauntlet to other fund managers to open themselves up to similar levels of scrutiny.

The industry and regulators are currently in discussions on how to make transaction charges more transparent. One of the challenges they face is providing a figure which is comparable across different markets and sectors.

From the hundreds of fund manager meetings we hold each year, our experience tells us managers do not trade without reason. Those who trade more frequently incur greater costs, and thereby give themselves a higher hurdle to jump.

Whether they trade frequently or rarely, active managers need to demonstrate they are adding value by consistently beating their benchmark index.

Ultimately investors are most interested in a fund manager’s performance, net of all charges, because this is essentially what determines their wealth. That is why an assessment of net performance, and an understanding of the fund manager’s process, should form the bedrock of any fund selection.”