The People’s Trust — small step or giant leap?
Posted by Robin Powell on September 8, 2017
Although I’m not a fan of active fund management generally, if there’s one active manager I’d like to see succeed it’s Daniel Godfrey.
Daniel is one of the fund industry’s good guys. It was he, you may recall, who was ousted as CEO of the Investment Association, the UK trade body, for daring to suggest — shock, horror — that members sign up to a statement of principles, requiring them, among other things, to put consumers’ interests first.
Let’s face it. Most of us, given a choice between lying low in return for an annual salary of £460,000, and risking it all by taking an ethical stance, would opt for the former. Daniel didn’t. He bit the hand that fed, and in doing so, I suspect, he played a part in persuading the Financial Conduct Authority that it really needs to tackle the opacity and conflicts of interest that continue to dog the asset management sector.
Now Daniel has launched a £125m fundraising campaign for a new initiative called the People’s Trust. The Trust will aim to return 7% a year over a seven-year period, including assumed inflation of 2%.
The idea has much to commend it. For starters, the Trust will take an unashamedly long-term view; unlike most other funds it’s going to invest in companies rather than simply trade stocks. The Trust will support the green tech sector, taking positions, for example, in manufacturers of equipment used to generate clean energy.
Daniel and the rest of the board are also going to have “skin in the game”, investing more than £1.5m of their own money between them from the outset.
So, will the People’s Trust succeed? The biggest thing it has going for it is Daniel Godfrey’s back story. PR is critical to gathering assets under management; Daniel certainly has plenty of contacts in the financial media and one thing that he can be sure of is a large amount of coverage.
But there’s a world of difference between what constitutes a successful outcome, on the one hand, for the Trust, its staff and the fund managers whose services its going to be using, and, on the other hand, for those who invest their money in it.
What worries more than anything about the People’s Trust is how much investors are going to be paying for it. I’m particularly disappointed that it’s chosen a multi-manager approach, which always sounds great from a marketing point of view, but which significantly adds to the cost.
True, the Trust will be trading less than most, and that’s a real benefit; transaction costs for active funds are often higher than the annual management charge. But, on its own, the AMC for the People’s Trust is set to be a whopping 1.07%. In other words, the managers the Trust has chosen are going to have to outperform the market, before costs, by at least that amount simply to justify the expense of investing in it. That’s a very tall order indeed.
Over the long term, only a tiny number of actively managed funds deliver any real value, after costs, over and above what investors receive from buying and holding a broadly diversified index fund portfolio. I sincerely hope I’m wrong, but I will be very surprised if the People’s Trust proves to be one of them.
True, many investors will be attracted to the Trust for its green credentials. But there’s an increasingly wide range of low-cost products now available to those, like me, who want to adhere to an evidence-based strategy and make the world a better place at the same time.
Dare I say, you could probably make a bigger contribution to the environment or other good causes by investing in a Vanguard Life Strategy fund for a tiny fraction of what you’d pay for the People’s Trust, and contributing everything you save in compounded fees and charges over the years to your favourite charities.
Radical though this venture is, then, I fear the People’s Trust isn’t anything like radical enough to give active management the massive kick up the backside it requires. I personally look forward to a new generation of active funds that, as well as a long-term focus, have a genuinely mutual ownership structure, plus, critically, a serious commitment to reducing unnecessary costs.
Why, for example, do fund houses have to be based in expensive offices in London? Why do they need marketing teams the size of a small army? Do they have to fly journalists and executives from big advice firms halfway round the word on expensive junkets? Is it necessary to employ several full-time managers to work on a single fund? And do we really have to pay them salaries 10, 20 or 30 times the national average?
The People’s Trust is one small step in the right direction. We could really do with making a giant leap.