Jeff Prestridge: Baillie Gifford’s rare and powerful statement

Our columnist is backing retail investors to get a bigger cut of the investment cake, and this star fund house has got the ball rolling.

I don’t often get excited by the many press releases from the financial services industry that often send my email account into meltdown.

Typically, they’re one-dimensional – ‘aren’t we wonderful’ (no, you’re not) – and paint a rather dishonest picture of the sector I probe into on a regular basis. Reading them, you’d never think the industry has done a thing wrong in its entire life. Come on, you banks and insurers, pull the other one.  

Yet, occasionally, there’s a line or sentence in one of these missives that grabs my attention like an adder would do if I saw it lurking at the bottom of my sleeping bag while camping out in the Lake District.

For the record, adders are common in the Lakes, I do like camping out in the summer, and I have seen them scurry across my path although they have yet to find their way into my sleeping bag. Perish the thought.

Such an attention-grabbing moment – a rare one, admittedly - came late last month when Edinburgh-based investment house Baillie Gifford announced it was tickling down the annual charges it applies to some of its investment funds and investment trusts.

I’m all for such trimming – fund charges in this country remain far too high – and Baillie Gifford is pretty good at getting the shears out. But it was the way the company described its move that got me to sit up and pay attention.

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Detailing its intention to reduce the annual charges on Baillie Gifford US Growth (LSE:USA), a £1 billion stock market listed investment trust, it said: ‘Across our whole fund and trust range, we aim to be as competitive on fees as possible as they are the only element of investment returns which can be guaranteed.’

It’s a powerful statement which I don’t think I’ve ever seen made before by an investment house which practices the art of active fund management (the ability of an investment manager to construct a portfolio that will outperform a chosen benchmark) as opposed to passive investing (where the emphasis is on tracking a chosen stock market index as closely as possible).

Usually, active fund managers tend to defend high charges on the grounds that their work involves a vast amount of research and investment brainpower. In contrast, passive management is computer-based and the investment outcomes more predictable. As a result, the big differentiator is not investment return but fees.

Deconstructing Baillie Gifford’s words, its message read as follows: ‘The only part of a fund manager’s investment return that is a given is the annual fee. Everything else is in the laps of the investment gods. Yes, good investment managers can outperform their benchmarks more often than not, but they can’t fight bear stock markets. Yet, come stock market hell or nirvana, the annual investment charge is levied and reduces investors’ returns. Our objective, therefore, is to keep it as low as possible.’

All rather decent and investor friendly of Baillie Gifford, I would say. But if it can trim its annual charges, then why can’t other investment managers which run banks of investment funds or investment trusts?

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Well, Baillie Gifford isn’t the only good ‘guy’ out there in retail investment management. Others, such as JPMorgan, have been quietly reducing charges, but they’re in a minority. The good ones can cut fees because they have been so successful in attracting new money from retail investors in recent years. After all, a 0.3% annual charge on a fund with assets of £1 billion is more lucrative to an investment manager than a £750 million fund with a 0.4% charge. In simple terms, the more assets under management, the greater the economies of scale – and the larger the scope for reduced fees.

Back to Baillie Gifford, it has been extraordinarily successful in recent years as its emphasis on growth investing has paid off handsomely. One only needs to look at Scottish Mortgage (LSE:SMT), the star of its investment show. It has assets of £20 billion, is a constituent of the FTSE 100 index, and has delivered returns to investors of 37%, 163% and 317% over the past one, three and five years. All at an annual cost to investors of just under 0.35% (a bargain whichever way you do the mathematics).

Investment houses with inferior fund performance records don’t possess the same ability to keep charges keen. Their assets aren’t growing as fast. Of course, they could be brave and cut in the hope of attracting new investors, but retail investors are more discerning than that – they want Baillie Gifford-like returns.

The regulator has become increasingly interested in getting fund management groups to prove that they offer investors value for money. It now requires investment houses to conduct value assessment reports on their fund ranges.

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A great idea in theory, but in practice most fund managers have paid no more than lip service to the regulator’s demand. Certainly, the reports have not resulted in a flurry of annual charges being reduced. The Financial Conduct Authority (FCA) is not a happy bunny and has threatened the use of ‘other regulatory tools’ if investment managers don’t take such reports seriously. Given its failure to lance the Woodford boil, I’d be amazed if the FCA’s sabre rattling on this issue is no more than showmanship.

In the future, it’s vital that retail investors are given a bigger cut of the investment cake. Fund charges need to come down and investment managers need to be more innovative on how they apply them. For example, I love the approach that many investment trusts are adopting – reducing charges (the percentage rate applied) as a trust becomes larger. It aligns the financial interests of investors and fund managers.

So, let’s hope that I get more Baillie Gifford-like press releases in the weeks and months ahead – informing me that fund charges are being cut. It would be music to my ears.