PA ANALYSIS: The price ain’t right as investors focus on fees but forget valuations

Getting value for money is the topic dominating the funds industry today, but on two different fronts.

Portfolio Adviser


While on one front investors are, rightly, concerned with fees paid for active management and related expertise, the pressure is also on stockpickers to be equally prudent in how they allocate their funds.

With the FTSE 100 reaching yet another all-time high on Thursday, past the 7,400 mark, it becomes harder and harder for true value investors to find genuine bargains.

The same can be said for the very funds where pricing is the primary concern – passive trackers and ETFs.

Andrew Merricks, head of investments, Skerritts Consultants, holds the view that the growth in passives – be they geographic, sector or smart beta factors – is not just driven by the need to keep costs down in a post-RDR world, but also a “symptom of a long bull market where everything goes up”.

“Investors in a passive fund are buying an assortment of stocks without any consideration being given to underlying valuations,” he asserts.

“It does not matter to the passive investor about the price that they are paying for what they are buying, except ironically it is the low cost of the product that they are buying that tends to attract the more favourable comments.

“The fact that they may be paying relatively little for something that is stuffed to the brim with over-valued assets seems to get lost somewhere”.

Still, Adrian Lowcock, investment director at Architas, argues that from an international perspective the UK market does not actually look so expensive, particularly compared to US equities.

He says: “You look at Tesla, which is on close to 160x PE, and its clear people are shelling out fortunes for some of these growth stocks.

“It’s the same for the FANGs – I get the disruptive technology story with some of the things Amazon and Netflix are doing, but can they really keep delivering?” 

So, if investors are willing to pay for active management in equities, but are still worried about market valuations, which sectors and funds should they be looking at?

“I think small cap managers are often very good at valuing companies, because they are often buying growth stories, while they also have experience of being disappointed by the growth not materialising as part of that experience,” Lowcock adds.

“Those who label themselves as value managers can also be interesting, particularly those who place themselves in the anti-Terry Smith [Fundsmith] camp.

“Whilst he is not an out-and-out growth manager, his philosophy is still buy good companies first and price is a secondary issue. There are plenty of people willing to jump on him when he underperforms”.


Latest Stories