An 'ethical' investment that could be worth a punt
Merryn Somerset Webb Oct 15, 2012
My dedication to this job knows few bounds. But at the moment I am taking things far above the call of duty. In order to be what is now known as 'RDR-ready' and to somehow share the pain of financial advisers and wealth managers the country over, I am taking a course (the retail distribution review sets a new higher educational standard for advisers from 2013).
It’s been a depressing experience so far. That’s not because it isn’t well taught, but because the content is less a constructive educational experience than a run through the financial products and systems charting the dismal record of greed, fear, corruption, incompetence and ignorance that is much of our financial industry.
So we have covered structured products, all manner of the kind of derivatives you will want to hope your own adviser never introduces to your portfolio; split level trusts; synthetic exchange-traded funds; hedge funds; with profits policies; payment protection insurance; critical illness insurance; and the thing I loathe the most, the single premium life assurance bond (or 'Splab') a tax avoidance product that in one wrapper seems to sum up all that is wrong in the world.
We’ve also spent a long time on tax stuff. Figuring out tax liabilities for individual case studies, wandering through all the various bands paid by the great British public (10%, 20%, 40%, 50%, 18%, 28%, 32.5%, 42.5% to name a few) and looking at the huge variety of alternative financial products that might reduce tax liabilities.
It is complicated and dreary, and I am beginning to think that we could much improve our taxation system by forcing all MPs to take the same course: get them into a room over at BPP Professional Education for three days on the trot, and I can all but guarantee that a flat tax would have seen off the Splab by Christmas. BPP are pretty busy, but I daresay they might find a few spare seats.
Still, amid the misery, every now and then I come across a new product that offers hope. And so it is with the launch of the Battle Against Cancer Investment Trust (or Bacit), a new fund of funds that will invest in “long only and alternative investment funds across multiple assets classes”. This is usually the kind of thing I would avoid like the plague. Why? Cost. Fund of funds come with double layers of fees: you pay the charges of the manager choosing the investment funds, and then you pay all the underlying charges of the funds he chooses too. That’s bad when you are looking at ordinary funds, but horrific when you start looking at anything remotely 'alternative'.
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Add the 1-2% of the main manager to the 2-3% of the hedge fund manager, chuck in both of their performance fees and the ordinary investor usually finds most of the money is gone before it gets to his turn for a take.
Terry Smith of Fundsmith did the numbers on this with reference to Warren Buffett’s Berkshire Hathaway a few years back. If you’d invested $1,000 with him when he started, you would have $4m now. However, if he charged a typical hedge fund style fee of 2% plus a 20% performance fee, you’d have a mere $400,000: 90% of the return would have gone to the manager rather than the investors.
So here is the good thing about the Bacit: it doesn’t come with any charges. All the funds that will be in the portfolio are offering their services fee free, so that their gains will roll up free of charge every year. In Buffett terms, this means investors should get the $4m rather than the $400,000.
At the same time, the prime mover behind the fund, ex hedge fund manager Tom Henderson, is stumping up for a percentage of the expenses. There is to be a charitable contribution of 1% every year (half will go to the Institute of Cancer Research and half to charities voted on by shareholders) in lieu of fees, so the total expense ratio of the fund will end up at a reasonable 1.2-1.3%.
Why this outbreak of altruism on the part of the managers? There is a trend across finance for people to want to 'give something back'. You might say, with good reason, that you rather wish they hadn’t taken so much in the first place. You might then dismiss the whole thing as PR. But I’m not sure you should.
It is risky – a good many of the funds have excellent, but also uncomfortably short, histories; we don’t know how good Bacit's management will be at allocating money between them; and there is no guarantee that the fund won’t launch, go straight to trade at a discount to its net asset value and stay there until its first wind-up vote in five years.
But, Henderson is, I think, genuine in his desire to make this a brilliant investment (not only is he to be heavily invested in it, but the more it makes the more his charities get), he has a good record and a good team, and if you want hedge fund exposure this is a one off opportunity to get it cheap. Killik & Co, getting into the spirit of the whole thing, is offering commission free dealing for those who want to buy into the IPO.
• This article was first published in the Financial Times.
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