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Retail investors miss out on outperformance enjoyed by institutional investors due to higher costs

Retail investors are missing out on active funds’ outperformance of passives because they pay higher fees than institutional investors, new research shows.

Different fee levels mean fund share classes that are accessible to institutional investors have outperformed passives, but retail investors’ share classes have underperformed, a group of four Dutch researchers has found.

The research paper, Fund Selection: Sense and Sensibility, is the result of analysis of the performance of Luxembourg and Ireland-based Ucits equity and fixed-income funds between 2008 and 2020.

Actively managed funds’ performance, both gross and net of costs, was compared with passive funds and index benchmarks, with results weighted by funds’ assets to reflect where most client money was held.

This article was previously published by Ignites Europe, a title owned by the FT Group.

Active equity funds on average outperformed passive funds by 0.56 per cent a year before the impact of costs was included.

Looking at 35 separate equity fund categories — such as global emerging markets and UK large caps — the researchers found that active funds outperformed in 28 categories, or 80 per cent, although this outperformance was only deemed to be statistically significant for six of them.

This outperformance “weakened” when the impact of funds’ fees was included in the analysis.

Evidence of outperformance was “still there” for 25, or 71 per cent, of the fund categories when looking at institutional share classes after accounting for fund fees.

But this evidence is only present for 16, or 46 per cent, of fund categories when retail share classes are examined.

“Active equity managers can outperform the passive alternative when fees are reasonable,” the authors concluded.

The research is “less supportive” for active fixed-income managers, the researchers said.

“Retail investors experienced negative net outperformance due to the level of fees across fixed-income categories.”

But even for fixed income, lower fees meant institutional investors experienced positive net outperformance in three of the seven fund categories assessed.

The researchers also presented active funds’ outperformance of passives in absolute terms. By combining percentage returns with funds’ total net assets, the researchers found the average “value added” by active funds each year.

Using this approach, active equity funds on average were found to add value of €220,000 a year before fees for retail investors.

“Unfortunately, the retail investor — given the fees — could not benefit much from this active management skill since the average €410,000 in fees charged largely exceed the gross value added,” the researchers write.

As a result, average active equity funds ended up losing value for their retail clients of €190,000 a year.

This finding was not consistent across all fund categories, however, with average active funds in 15 categories, 43 per cent of the total, able to deliver positive value to retail investors after fees.

Retail share classes’ ongoing charges averaged 1.71 per cent, while institutional classes averaged 0.82 per cent across all active equity funds analysed, the research shows.

Equivalent charges for fixed-income funds averaged 1.13 per cent for retail clients and 0.47 per cent for institutions.

Ucits funds’ retail share classes are distributed across widely different geographies, most of which still allow for the payment of retrocessions, which increase the funds’ annual charges, the researchers added.

“As the ban on retrocessions becomes more widespread, we would expect [ . . .] retail fees to decrease to reflect this change,” Jan Jaap Hazenberg, one of the report’s authors, told Ignites Europe.

“They could/should eventually converge to the institutional level,” he said.

The founders of Ancient Greek Sandals on building an international fan base with their heritage-inspired footwear

In 2008, Christina Martini and Nikolas Minoglou were introduced by a mutual friend and went out for dinner together in Athens. Their subject for discussion? Greek sandals. Martini, who trained at Cordwainers in London, was at that time living in Paris, a high-flying shoe designer at Balenciaga who had previously worked with Marc Jacobs at Louis Vuitton. Minoglou, whose grandfather founded a rubber shoe business in Greece in the 1950s, had recently completed an MBE at Babson College in Boston and was looking to set up something of his own.

“We had both realised there was a hole in the market,” says Martini, speaking from her studio in Corfu, where she now lives with her husband Apostolos Porsanidis Kavvadias and young family on an olive farm. “We wanted to make Greek touristic sandals in good quality and export them.”

“Our friends would come to Greece and they would buy sandals and olive oil and go back home,” adds Minoglou. “We knew people liked them. But we realised that the quality and design were not where they should be. We saw Greeks looking down on the sandals, on the heritage. We wanted to do the opposite, take our heritage and make it into something more modern and better. It was a very specific idea, hence the name.”

This year, Ancient Greek Sandals is celebrating a decade in the business. Manufacturing in Greece and selling across the world, from America to Japan, via its own website (ancientgreeksandals.com) and Athens flagship, and through retailers such as Le Bon Marché and Net-a-Porter, it has a loyal following across its ranges for men, women and children. Designs range from the traditional leather thin-soled strappy Greek sandal to trendier contemporary versions studded with crystals or in coloured rubbers. The brand also produces sandals with thicker soles for urban environments, as well as clogs and flip flops. The simpler leather styles for women start at about £155 — which is twice the price of the most basic Birkenstock, but only a quarter that of equivalent styles from international designer names — and clogs can go up to £295.

Different regions favour different varieties. From the beginning, Ancient Greek Sandals’ biggest market has been America. “They prefer the more bling styles, the evening styles, the crystals that we’ve done lately. Or jewels from our collaboration with [the New York fine jewellery brand] Lalaounis,” says Martini. “Americans also like something soft. That’s one of the reasons we did a comfort construction, with a thicker sole. The Asian market likes that too. The French really admire ancient Greek culture, so they prefer the leather styles that have straps and cut-outs. But everyone in the world is familiar with Greek mythology, with ancient Greek art and architecture, so it’s an easy concept to love.”

The brand’s anniversary capsule collection celebrates that perennial fascination with the land of the gods, with 10 sandal designs inspired by ancient Greek sculpture. Martini worked with art historian Xenia Ventikou to select pieces currently found in international museums, including the Louvre, the British Museum and the Metropolitan Museum of Art.

“I had in mind to tell the tale of women, goddesses, priestesses, matriarchs and heroines, each one unique in her own way,” says Ventikou. “We also wanted to cover the whole length of Greek art, from the Geometric period to the Romans.” Martini and the design team honed in on seven statues, two figurines and one vase, finding details and motifs within them for design inspiration: twisted necklaces seen on ancient clay figures; the delicately pleated robes of classical statuary; the ankle-tied sandals found in sculptures of Artemis the hunter; and the wings of the Winged Victory of Samothrace and draped skirts of the Venus de Milo, two of the most famous statues in the world, both found today in the Louvre. “I just love the way that the famous hair-locks of the Dame d’Auxerre were turned into a lace, and the arm bracelet of the Crouching Venus became ankle jewellery,” says Ventikou.

In the still shaky days following the Greek financial crisis, building Ancient Greek Sandals as an international but seasonal brand, outside of the traditional fashion capitals, was always going to be a challenge. Only a handful of Greek fashion brands, such as Zeus & Dione, have made global names for themselves from their home country. Marios Schwab and the late Sophia Kokosalaki both found success in London. “Yes, things can be more difficult in Greece compared to starting up something in a fashion capital,” says Minoglou, “but on the other hand, because Athens is a smaller community, and because we had my grandfather’s and father’s business as a platform, we had lots of contacts with factories and administration. The crisis was in fact helpful because in the four years afterwards, factories were still closing down and those open had excess capacity. We were able to get their attention more easily.”

Seasonality was factored in from the beginning. “We both agreed it was better to focus and do something really well than have a multi-season, multi-category brand,” says Minoglou. “Sales aren’t as strong during winter,” adds Martini. “We have the southern hemisphere, Australia, but there’s no comparison to the European/American summer season.”

According to Minoglou, the company has been profitable, without loans, since year one. “Since 2017 to now, the brand has grown 25 per cent on wholesale and direct to consumer,” he says. “Covid brought us down 30 per cent overall, but now we’re at pre-pandemic levels, slightly more.” The pandemic hit the company with problems in wholesale and the dramatic hiatus in international travel. It halted production for three months. “We adopted a more aggressive strategy in terms of digital marketing because our online shop was up and running throughout. So we did promoted posts to liquidate stock and introduced an upcycled collection very fast that had a lower starting price. We came out of it healthy, with no major scars.”

The brand, which opened its flagship boutique in Athens in 2019, has recently expanded to homeware, including blankets and leather basketry inspired by Martini and Kavvadias’s home on the olive farm, and introduced a collection of leather bags (starting at £155) and crochet bags (starting at £215), which Martini and Minoglu expect to be a significant future category. Collaborations with other brands and individuals continue to be a way of introducing creative newness into the tried-and-tested sandals. There have already been partnerships with the Australian jeweller Lucy Folk, influencer Harley Viera Newton and the Hotel Sirenuse on the Amalfi coast. Future plans include setting up a store within an international hotel.

While Minoglou is based at the offices in Athens, close to manufacturers and suppliers, Martini continues to finds inspiration in her sea-view location in Corfu, where she moved from Paris the same year they established the brand. “If it hadn’t worked out with the sandals, I’d have to have moved back again,” she says. A decade in and that is not a concern. “For designing high fashion, I don’t think Corfu would work, but for what I do now it’s the perfect place to be.”

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- ALKB DC : ALK-Abello 2Q Revenue Beats Estimates

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- POST AV : Austrian Post 2Q Ebit Beats Est.; Targets 2021 Result Levels (1)

- BAVA DC : Monkeypox Vaccine Maker Has Concerns on US Dose-Splitting: WaPo

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- COA LN : Coats to Conduct Placing to Raise About £100M

- COIN US : Coinbase Under SEC Scrutiny Over Its Crypto-Staking Programs

- COLR BB : Colruyt Family Raises Colruyt Holding to 60.9% as of Aug. 4

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- DNO NO : DNO 2Q Ebitda Misses Estimates, Declares Dividend

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* Komax Raised to Add at Baader Helvea; PT 300 Swiss francs

>>> Down

* Covestro Cut to Neutral at Oddo BHF; PT 39 euros

* Deliveroo Cut to Neutral at Citi; PT 110 pence

* Intl Petroleum Cut to Equal-Weight at Barclays; PT 148 kronor

* TAG Immobilien Cut to Sell at Deutsche Bank; PT 9.50 euros

>>> Initiation

* Harbour Energy Reinstated Buy at Goldman; PT 609 pence

>>> Call

* Deliveroo Cut to Neutral at Citi on Limited Upside Potential

* Komax Upgraded to Add at Baader After Schleuniger Deal

* Metro 3Q an Ebitda Beat, Lacks Details on Key Issues: Jefferies

* Zurich Insurance Results ‘Very Strong,’ Buyback Positive: MS

Kwarteng says shipping wood pellets from Louisiana is costly and ‘doesn’t make any sense’

The UK’s business secretary has admitted that importing US-made wood pellets to be burnt for energy by power company Drax is not sustainable and “doesn’t make any sense”. 

Kwasi Kwarteng also told MPs that the government had not fully investigated the sustainability of burning wood pellets, a type of biomass. He said the Department for Business, Energy and Industrial Strategy had discussed biomass with industry but “we haven’t actually questioned some of the premises” of the sustainability of pellets.

The government has spent millions subsidising the burning of pellets in Drax’s Yorkshire facility over the past decade and the fuel features prominently in the UK’s net zero strategy.

Kwarteng made the comments this week during a meeting with a group of cross-party backbench MPs, who raised concerns about the sustainability of wood pellets, which are described as renewable by Drax.

“There’s no point getting [wood pellets] from Louisiana . . . that isn’t sustainable,” said Kwarteng. Shipping pellets from Louisiana — one of Drax’s sourcing regions in the US — has “a huge cost financially and environmentally . . . [it] doesn’t make any sense to me at all,” he added.

Drax has been gradually converting its coal-fired power station to biomass power and is seeking to reinvent itself as a green energy company. The company, which imports about 80 per cent of the wood pellets it uses in the plant from North America, received around £832mn in government subsidies in 2020 and about £790mn in 2019, according to analysis by think-tank Ember.

That support is due to expire in 2027, but the company is seeking new subsidies for the development of biomass paired with carbon capture and storage technology, known as Beccs.

Drax argues that its pellets are responsibly sourced and that the emissions produced by their combustion are offset by the growth of new carbon-absorbing trees.

However, numerous environmental groups and scientists have questioned these claims. They argue that it takes a long time for trees to absorb carbon, that importing pellets is emissions-intensive and that the large-scale harvesting of wood threatens ecosystems.

In January, David Joffe of the Climate Change Committee, which advises the government, said there were “big challenges about ensuring the sustainability of biomass grown outside the UK”. He added that imported biomass was “not something that the UK should be relying on at large scale”. However, the committee has stressed the need for some biomass energy if the UK is to reach its target of net zero carbon emissions by 2050.

Allies of Kwarteng confirmed that he had raised concerns about Drax’s use of pellets imported from the US. But he was said by colleagues to remain fully supportive of the company and the biomass sector, which they said was a vital baseload provider for the UK power network.

“Without Drax, the UK would have to import more electricity from Europe at a time when the continent is in serious trouble,” said a government official.

In the meeting with MPs, Kwarteng admitted that biomass had not developed as quickly as other renewable fuels, such as offshore wind and hydrogen.

“I can well see a point where we just draw the line and say [biomass] isn’t working, this doesn’t help carbon emission reduction and so we should end it,” he said. “All I’m saying is that we haven’t quite reached that point yet.”

The government’s net zero strategy envisages that the use of Beccs would account for two-thirds of so-called “negative emissions” — or technologies that remove carbon from the atmosphere — in the UK by 2050.

It has committed £1bn for the development of a carbon capture sector, including £30mn to support the production of “sustainable domestic biomass.” The business department also said it would “develop markets and incentives” to support investment in emissions removal technologies including Beccs

“The business secretary has always been clear biomass has a key role to play in boosting Britain’s energy security,” said a government spokesperson. “The UK government only supports biomass which complies with our strict sustainability criteria and will shortly publish our biomass strategy which will further detail our position on its future use.”

A Drax spokesperson said the company “is one of Europe’s lowest carbon intensity power generators and our sustainable biomass is critical to UK energy security, supplying enough reliable renewable electricity to keep the lights on for 4mn households”.

Rising interest rates could cost some borrowers more than rising energy bills

How much could your household finances be squeezed in the next few years? The answer could well come down to the size of your mortgage.

If you’ve borrowed a lot of money to buy your dream home, rising interest rates have the potential to curb the spending power of the middle classes much more than rising energy bills have done so far.

I have a friend who has been paying an extra £500 a month on her mortgage since she rolled off a fixed-rate deal. She needs to move house in a year, for school-related reasons, so didn’t want to lock into another fix.

When the Bank of England increased the base rate by half a percentage point last week — the biggest rise in 27 years — she sent me a WhatsApp message saying “Arrrrrrghhhh”.

Most UK borrowers have locked into a fixed rate, but around 1.3mn will expire this year and 1.81mn next year, according to trade body UK Finance.

Bank of England data shows more than £10bn was overpaid on mortgages in the first six months of this year — a trend evidenced in FT Money’s bonus survey in February, where 13 per cent of respondents said this was your intention.

Soaring property prices, bigger mortgages and lengthier repayment terms mean that even a small change to interest rates will increase the lifetime costs of your home loan.

Here are some points to consider well in advance of when your current fix comes to an end.

Anyone with a fixed mortgage needs to plan for what to do when it expires. Find the date, ring it in your diary and be ready to start looking for a new deal at least six months beforehand.

“The amount of mortgage applications lenders are getting are still at very high levels, and we’ve seen two or three pause taking on new business while they get back up to speed,” says Andrew Montlake, managing director at mortgage broker Coreco.

He has heard stories of customers waiting three to four weeks to get a mortgage review appointment, by which time interest rates have risen.

If you’re sticking with the same lender, remortgaging deals — known as retention products — can’t usually be secured until you have less than four months remaining. But if you’re switching to a new lender, it’s often possible to “lock in” a rate six months ahead of your current deal expiring.

Expect to pay around £500 for an independent mortgage broker to help you find the best deal for your circumstances.

Careful preparation should mean you avoid the misery of reverting to your lender’s standard variable rate (SVR). The average SVR is already 5.17 per cent, according to Moneyfacts, the price comparison site.

This figure has increased for eight consecutive months and is likely to swell further, adding up to a huge payment shock for those who roll off a fix.

You won’t thank me for saying that the best time to fix your mortgage was six months to a year ago.

Five-year fixes are still the most popular product, but the average rate offered on these deals breached 4 per cent in August, according to Moneyfacts — a level last seen in 2014.

The average two-year fix is a shade under this at 3.95 per cent.

The more equity you have in your home, the better the rate you will be able to secure. However, deals with the lowest rates tend to have the highest fees (typically £1,000 or more). Add the fees to your loan, and you’ll be paying interest on top.

Mortgage brokers report early signs that more borrowers are prepared to gamble on a two-year fix, betting that central banks will be forced to cut rates in a recession.

High-profile US investors Cathie Wood and Ray Dalio have both said they expect to see rate cuts in 2023-24. However, non-billionaires are likely to value the certainty of a fixed rate on their biggest monthly outgoing.

Whether you’re buying a home or remortgaging, speed is of the essence. The average mortgage product has an average shelf life of just 17 days, according to Moneyfacts — an all-time low.

If a lender’s rate moves to the top of a best buy table, they will often withdraw it swiftly to avoid the operational challenge of a deluge of applications.

“I could give a client one rate at 9am, then have to call back at noon and say that deal is being withdrawn at 5pm today,” says Coreco’s Montlake. “Some clients think it’s a sales technique, but that is the reality of the market.”

With rates ticking up, you may be tempted to pay a penalty to quit your existing deal and lock into a new one.

As a rule of thumb, early repayment charges on a five-year fix are 5 per cent of the outstanding balance in the first year, falling on a sliding scale to 1 per cent by the final year.

If you break a fix on a £500,000 mortgage with two years left to run, that could cost you £10,000, plus product fees for the new mortgage — and your monthly repayments would instantly be higher.

Is it worth it? A free mortgage calculator from budgeting app Nous.co attempts to answer this question based on market predictions about where interest rates could be by the time your fix ends and what the likely costs or savings could be.

I’d also use a mortgage overpayment calculator to see what impact using that cash to make a one-off repayment could have, assuming your mortgage deal allows this, and whether this could tip you into a lower LTV. Sprive, a new app, allows people to vary their overpayments in accordance with their monthly spending.

Landlords are more likely to have interest-only mortgages. Though most are locked into fixed-rate deals, this means they will be exposed to much bigger cost swings than repayment borrowers when rates expire.

Lenders apply a range of affordability calculations to buy-to-let loans. The main one is the interest coverage ratio — the monthly rent expressed as a percentage of your monthly interest payment — typically 125 to 145 per cent.

However, lenders use a “stress rate” to calculate these ratios and this is much higher than the actual interest paid on the loan.

David Hollingworth, associate director at broker L&C Mortgages, notes that several lenders have increased their stress rates this month, and expects others to follow. “The upshot will be landlords need to charge higher rents to borrow the same amount,” he says.

For example, Metro Bank has just upped one of its stress rates from 4 to 5.5 per cent, and demands interest cover of 140 per cent.

On a £200,000 interest only mortgage, he calculates this would mean landlords require an extra £350 of monthly rental income to satisfy the lender’s requirements.

As we’ve been hearing on the Money Clinic podcast this week, renters are already finding these higher costs are being passed on to them, with London letting agents reporting rent rises of 40 per cent on the renewal of tenancies.

However much rising mortgage rates make you want to scream, just be grateful that you own your home.