When we speak with advisers about utilising discretionary investment (DFM) services, as you would expect, cost is a key consideration. Charging structures are often complex, widely misunderstood and sometimes shrouded in misconception. This week we spoke with Lawrence Cook, Director of Marketing and Business Development at Thesis Asset Management to gather his views on charges and cost transparency, with a particular focus on the changes they have made to their Optima fund range (which coincidentally, has resulted in a reduction in overall cost to clients).


DISCUS. Lawrence, firstly can you talk us through the Optima fund range, where they are available and how they fit with the other Thesis propositions?


Lawrence Cook (LC). The Optima fund range is a unitised manifestation of our discretionary investment process (‘Unitised DFM’). Thesis operates a centralised investment process. In other words a team decides on asset allocation and fund/stock selection, which then is applied through our various services as opposed to individual managers making their own investment decisions.


Being able to access a genuine discretionary portfolio in a unitised format is proving popular. A clear differentiator, for example, is the direct investment into UK equities rather than collectives. This makes good use of our expertise in UK equity research and has the happy by product of reducing the Ongoing Charges Figure (OCF) as clients do not bear the cost of the fund wrapper.


We run seven risked based mandates simply numbered 1 through 7. The Optima range sits neatly across the range at 2, 4 and 6 (to help advisers we have risk mapped our 7 mandates to a number of popular risk profiling tools including Distribution Technology, eValue, Finametrica, Oxford Risk, Harbour and more).


Advisers can access Optima via a range of wrap platforms including Ascentric, Aviva, Fusion, Novia, Nucleus, Standard Life and Transact. Optima may also be purchased directly with Thesis on our own nominee account. The clean ‘C’ share class has an annual management charge of 0.50% p.a.


DISCUS. What are your views on the asset market review and was this in any way a driver for the changes?


LC. Whilst DFMs are only partially in scope I think we need to act as if we are fully in scope.


The change in Optima to remove UK equity funds in favour of direct UK equities was not in itself a response to FCA concerns. We review our proposition every month and challenge ourselves on what we do and how we do it. Are we delivering what clients want? Is it value for money? Could we improve it? etc.


After running our own UK equity research since 2011 we felt we had a sufficient track record to back ourselves rather than other UK equity asset managers. It made sense then to invest directly in UK stocks and thus remove the cost of the unit trust wrapper. The overall effect was to reduce the OCF in Optima funds and add differentiation to the market place: more choice for advisers and clients.


I do get cross when I come across competitors not being clear about costs/charges. It really is not in the best interests of clients, advisers, and believe it or not in the best interests of DFMs themselves. Just recently an IFA asked for investment proposal using our model portfolio services – the other two competitors asked decided not to show the underlying expense ratios of the funds included in the portfolio but just their own management charge. That really doesn’t help support transparency. One of these firms is in the DFM Alliance – come on chaps, do better!


We decided some time ago to move to an all in one charge for discretionary services, doing away with trading costs. Overall this doesn’t reduce the costs to clients but provides much greater transparency. This helps advisers and clients alike make meaningful comparisons.


The report highlights asset managers that are effectively tracking the benchmark and charging high fees. The implication is that you might as well buy a cheap passive tracker if all your investment manager is doing is tracking the market anyway. As a snapshot that might be harsh, but over a period of time it is a reasonable point to make.


Thesis adopts a very different stance. A good example of this is in the latest ARC report which shows that in the Cautious risk profile the Thesis portfolio experiences the lowest risk* of all 70 managers subscribing to ARC – this emphasises that we will take positions according to the output of our research and we do not manage to the benchmark. Clients are therefore getting a service that is distinct and, we hope, worth paying for.

*Risk in this context is measured by volatility relative to cash.


DISCUS. What effect are the changes likely to have on charges for clients?


LC. The good news for clients is that the OCF reduction on the three funds for class C shares is:

» Income 1.19% (previously 1.38%)

» Balanced 1.04% (previously 1.48%)

» Growth 1.07% (previously 1.41%)


This affects existing unitholders as well of course so is good news for them and for potential new investors.


We already use this approach of direct investment into UK stocks in our segregated discretionary service – bespoke and model, so no change there. This brings the Optima range in line with our other discretionary services.


DISCUS. Why was the decision taken to use direct equities rather than tracker funds, given these will attract dealing/trading charges?


LC. Good point. Since we began running our UK equity research we have benchmarked our performance against the FTSE350 and since then we have returned 127.6%% against the benchmark of 61.7%% (source FE Analytics 01/08/11 to 24/03/17).


So we felt that if clients can access that service but without the unit trust wrapper costs, that would be great.


DISCUS. Were ETFs considered rather than equities?


LC. At heart we are an active manager. However we take an agnostic view. Where we can’t see value in an active solution we use passive instruments. In the UK we are confident that, based on our track record, we can deliver value so in the UK we are likely to continue with direct investment into UK stock.


In other markets we do use ETFs to gain exposure to certain assets, such as global smaller companies (Vanguard Global Smaller Companies tracker fund).


DISCUS. What has been the adviser feedback to date regarding the changes?

LC. The feedback has been very positive but in some way difficult to get across. Why? Because advisers are by necessity sceptical of any provider, including DFMs: they have to be, that’s their job. So to get across a message that is different to the one they expect is sometimes hard; that is, this is good news for clients, and yes – it has reduced the overall cost to the client.


Use of DFMs by advisers has become more sophisticated and they have a greater understanding that using a range of unitised, bespoke and model services are all useful tools. Advisers recognise that having all three available from Thesis using the same underlying investment process is valuable. It allows for application of the same investment process but through the most appropriate service.


DISCUS. Do you expect other discretionary managers to implement similar strategies? Do you think there is a general move in the market in terms of reducing costs?


LC. Not all DFMs have the capability of a larger business like Thesis, and they don’t have the research capability or the operational functionality to run direct equity portfolios. So this isn’t necessarily easy for all DFMs to do. You also need an enviable track record in running equity portfolios. That narrows down the potential runners and riders to quite a small number.


We do need more innovation from DFMs and the more we can do to help advisers and clients the better.


For advisers who want to get up close to Thesis there is an opportunity to do so at our third annual investment conference on 23 May, in Winchester. Last year there were over 100 delegates and we are expecting a similar number this year. Do check out the Thesis website if interested. Our speakers include Rory Percival, appearing as himself, Keith Richards CEO of the Personal Finance Society, Jonny Gamble of ARC, Mike Morrison of AJ Bell and more.


Thanks for your time Lawrence. Readers, if you have any comments or feedback to share please post in the space below.


This post was created for the DISCUS based on an interview with Lawrence Cook of Thesis Asset Management. You can find out more about their discretionary investment services here ›