Kames Capital bond fund fee cut a 'sign of things to come'
UK and Dublin-domiciled funds lowered by up to 30bps
Industry commentators are calling Kames Capital's decision to cut its bond fund fees a "sign of things to come" for fixed income funds which are still deemed expensive, with the rise in popularity of bond ETFs adding to the pricing pressure.
Earlier this week, Kames announced it was reducing the fees across its fixed income range in a bid to "remain competitive and provide investors with value for money".
Nine of the firm's UK and Dublin-domiciled bond funds will see their fees lowered by up to 30 basis points in the move, which takes effect from 1 January 2020.
While Kames' announcement was welcomed by the industry, some fund selectors said the fees could have been reduced further.
Ben Yearsley, investment consultant at Fairview Investing, said the new bond fund fees were not yet at the right level but "they are getting there".
Ryan Hughes, head of active portfolios at AJ Bell, said that while some of Kames' bond funds would now be "competitive" on costs, others in the range would be up against high-quality funds with lower fees.
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"The reduction in fees on the Kames fixed interest range is welcome as they were clearly at the more expensive end of the market and we had been feeding back for some time that a reduction was needed," Hughes said.
"The reduction to the High Yield and Investment Grade funds has put them in a much better position but there are some high-quality funds that remain materially cheaper.
"The cut to the Sterling Bond fund now puts the fund in a very competitive position, with the sub 0.4% level appearing to become the new target for this type of strategy, and given the similarities between this fund and the Investment Grade fund, the cheaper fund certainly looks more attractive."
He added: "The new pricing brings the ongoing charges figure (OCF) for the range to at or below the average for their respective sectors, which is encouraging. The High Yield fund will be priced at 0.59% while Investment Grade will be 0.52%."
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According to FE Fundinfo, the average OCF in the IA Sterling High Yield sector is 0.8%, while in the IA Sterling Corporate Bond sector it is 0.51% and in the IA Sterling Strategic Bond sector it is 0.75%.
Hughes warned: "However, with high-quality managers such as TwentyFour Asset Management available for under 0.4% and the new Artemis fixed interest range being priced aggressively, investors have the option of some very high-quality managers for attractive fee levels."
Artemis launched two bond funds under former Kames co-heads of fixed income and high yield respectively Stephen Snowden and David Ennett this quarter, as revealed by Investment Week, following the launch of the Artemis Short Dated Global High Yield Bond fund for former Kames managers Stephen Baines and David Ennett in June, which has an OCF of 0.41%.
The Artemis Corporate Bond fund and Global High Yield funds have OCFs of 0.4% and 0.5% respectively.
Jason Hollands, managing director, business development and communications at Tilney Bestinvest, commented: "Kames Capital's move of course comes hot on the heels of its former high-profile manager Stephen Snowden arriving at Artemis and launching the Artemis Corporate Bond fund.
"It is a broadly similar fund to the Kames Investment Grade Bond fund he used to manage, but with a more competitive fee. I think it highly likely that this will have helped focus minds at Kames Capital."
Competitors
Hughes warned Artemis' pricing could force its other competitors to review their fees.
"With Artemis pricing aggressively and having no assets in this space to protect, they have been able to really go after assets in other more expensive funds and this could easily result in other managers having to respond with a reduction in fees," he said.
Yearsley pointed out the Kames funds would still be more costly than the Artemis proposition after the price cuts kick in.
"[It is] interesting that the Kames funds are still more expensive than the new Artemis funds from the old Kames managers.
"But ultimately it is easier launching new funds at a lower cost than re-pricing old ones as any new business that Artemis gets, for example, will not be business they had six months ago."
He added low interest rates and the increasing prevalence of passive ETFs are weighing on fixed income fund charges.
"We are in a lower-for-longer environment - that has more of an impact on bond funds and therefore charges are more important too. Too many funds are too expensive so prices need cutting.
"Straightforward investment grade funds should have OCFs of 30bps-40bps. Strategic bond funds should have OCFs of up to 50bps.
"While scale obviously plays a role in the OCF it is a competitive world - not just against other active managers but also passives."
According to research and consultancy firm ETFGO, fixed income ETFs/ETPs listed in Europe saw net inflows of $52bn for the year to October 2019, considerably greater than the $12bn in net inflows in the year to October 2018.
Tilney Bestinvest's Hollands agreed: "There is clearly fee pressure across the industry, in part due to the growth in ETFs and passives", while AJ Bell's Hughes added: "It seems as though there is some price competition happening in the fixed interest space, which is certainly a step in the right direction as asset managers respond to the challenge of passives.
"With 0.4% for investment grade bonds seemingly the new target, many managers will be thinking hard about how to respond to the challenge, particularly as it will mean a revenue hit as they effectively re-price their existing book of business."
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