McManus’s comments come as Aberdeen Standard Investments mulls whether to cut fees on the UK’s most expensive FTSE All Share tracker under its joint venture with Virgin Money, which has been charging investors 1% for passive exposure to the index.
At the other end of the spectrum, Lyxor Asset Management last month introduced the lowest cost ETFs in Europe, charging investors as little as 0.04% for core US and UK equity exposure. At the time of the launch, Lyxor touted the slashed fees as a move that brought the US price model to Europe.
McManus, speaking at a press event that coincided with the Lyxor ETFs launch, said low cost “doesn’t matter without quality”, which includes high quality replication of an index and high quality risk management.
But, he added: “Any basis point we can squeeze out of the process from asset allocation to trading to product selection, that saves our client a basis point that improves their return, especially when you include compound interest.”
McManus said Nutmeg had not yet invested in Lyxor’s latest ETF products, although he said the price makes them attractive and it would be conducting due diligence on the funds.
“There’s a significant fee difference in some of these core markets such as US, UK or gilts,” McManus said. “Core exposure to the US has been incredibly cheap for some time.”
Nutmeg exclusively uses ETFs in its managed and fixed allocation portfolios, which include average fund costs of 0.21%. The Nutmeg management fee is 0.75% on managed portfolios up to £100,000 and 0.35% beyond that level. For fixed allocation portfolios, the fee is 0.45% for the first £100,000 then falling to 0.25%.
A client invested in a defensive sterling-based portfolio will always have gilts exposure, McManus said, pointing out the compound impact of reducing fees on a portfolio’s core ETFs. “If you can lower the cost of that gilts exposure while still keeping the quality you are by definition going to increase the returns you could have had,” he said.
Index agnostic
McManus is one of a team of investment managers responsible for a range of products that currently includes 40 ETFs.
The first step for the investment managers is choosing indices that match the house asset allocation, then deciding which ETF provider offers the best exposure to the chosen index.
The robo adviser is agnostic when it comes to ETF and index providers, McManus said. “We are perfectly happy to use alternative index providers. Is there a high-level of due diligence that goes on there? Certainly, but it’s not outside our normal due diligence processes,” he noted.
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