Rob Davies runs the VT Munro Smart-Beta UK Fund, which was acquired by Valu-Trac from Maven Capital Partners in October 2015. But getting institutional investors interest in it is an uphill struggle. The problem, he says, is that the asset management industry, the rating agencies and the financial media are biased towards larger, actively managed funds, which means that small passive funds like his don’t get a look-in. His experiences, he says, are typical in an industry that stifles genuine competition.
Tell us about your fund and what it does.
It tracks an index that allocates stock weightings by the size of a company’s total dividend payment. It is not based on yield, therefore there is no share price element in the index and this gives it a bias to value.
The fund is still relatively young, but how has it performed?
The fund is approaching its tenth anniversary. Most of that period was under the influence of QE which favoured higher risk assets such as small and medium cap growth shares at the expense of value shares. However, that situation changed at the start of 2016 and value has done well since then and the index, and the fund, have beaten market cap indices.
What did you make of the FCAs interim report on UK asset management, which pointed out the effective lack of competition?
It was well meaning but too verbose and did not explain how passive funds can deliver beta cheaply but active funds struggle to deliver alpha on a consistent basis. It totally failed to describe the complicit rôle that the press play in promoting active funds by, for example, always referring to the market cap indices such as the FTSE 100 while ignoring total return. The report failed to explain why features such as minimum size and track record make it hard for new funds to break in and challenge the existing large funds. It further failed to address the problem that most sales are still made by intermediaries who have less interest in reducing costs and simplifying products than the end investor. The FCA still makes it almost impossible for fund managers to market directly to the investing public who would be as capable of understanding Information Ratios and total charges as they would fuel consumption and insurance categories for cars or battery life and memory storage in mobile phones.
Presumably you would say your fund is a good example of a product that would benefit from genuine competition?
Indeed, if league tables rated funds on things like volatility, yield and portfolio turnover, investors would get a much clearer understanding of the risks and costs they were incurring in the search for alpha.
In your experience, what’s the single biggest way in which the industry makes it hard for funds like yours to attract interest from institutional investors?
The biggest single impediment is fund size. Even medium sized investors place minimum fund sizes as a hurdle before investing. Large institutions get round this by seeding funds from other parts of the business but that option is not available for start-ups, the ones that bring real, new competition to any industry.
What have the different fund rating agencies had to say about your fund?
Nothing, none of them have rated it because it is passive and small.
Do you think FCA’s proposed reforms will make a positive difference?
A bit, but not as much as it could do if it really embraced competition in the industry.
Ideally, what would you like to see that would create a level playing field?
Four things. Allow managers to market directly to the public, get the press to focus on total return indices instead of market cap indices, reconstitute sectors so that they only include securities from one asset class, i.e. disallow UK equity funds to hold bonds or foreign shares, and, as with cars and fuel consumption, publish officially calculated table that rates funds by turnover, information ratio, yield and not just past performance.
ROBIN POWELL is a freelance journalist and the founding editor of The Evidence-Based Investor. Based in Birmingham, England, he founded Ember Television and Regis Media, and he specialties in helping disruptive financial firms to grow. He also campaigns for a fair, transparent and sustainable investing industry. You can follow him on Twitter at @RobinJPowell.
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
