Financial services group St James’s Place (SJP) is charging annual management fees for its funds which are several times larger than the amount it is paying the external fund managers who actually manage the money.
Even the legendary Neil Woodford earns just a fifth of the amount that SJP got out of the SJP UK High Income Unit trust. The latest published accounts show Woodford Investment Management was paid £5.5 million for managing the £2 billion in the fund while SJP got £25.3 million.
Citywire has analysed the latest accounts of 34 SJP unit trusts. Our table reveals in the starkest terms and for the first time how much SJP gets compared to the external fund managers it uses.
You can see the full findings of our research here.
In total SJP earned £700.5 million, nearly four times as much as the fund managers it chose who were paid £183.8 million.
The revenue differential on individual SJP funds can be huge. For example, on the £7.5 billion SJP Global Equity fund, SJP earned £85.5 million over the year to end September 2016. This was nearly six times the amount (£15.8 million) paid across four investment management firms (BlackRock, EdgePoint, Sands Capital and Tweedy Browne).
In the starkest example, the SJP Alternative Assets fund SJP earned 40 times as much as external manager Blackrock (SJP earned £12.9 million compared to BlackRock’s £333,000). In percentage terms, this was 1.2% to SJP and 0.03% to Blackrock. The low external management fee could be explained by the fact that the underlying investments are almost exclusively in Blackrock passive products.
SJP argues that many of the funds it has put together involve external fund managers who are unique to the UK retail market and therefore cannot be purchased separately. Also each of its funds is bespoke, so comparisons with equivalent unit trusts are not appropriate. The SJP fees also include its platform, administration and other fees such as accounting (see box).
However, some of the more conventional SJP funds still earn many times more for SJP than it pays the external fund managers. For example:
- The SJP Money Market Unit Trust generated nearly 10 times as much for SJP as for managers State Street. SJP got a fee of £12.2 million from this £4 billion fund, while State Street got £1.29 million.
- On the SJP Gilt unit trust, SJP earned nearly eight times as much as the fund manager Wellington which was paid £270,000 compared to SJP’s £2 million.
- On the SJP Index Linked Gilts fund, SJP earned £2.1 million. This was nearly 20 times more than investment manager BlackRock’s £109,000.
The differential between the amounts SJP earns itself and the amount it pays external fund managers, is the real source of SJP’s overall profits. In its most recent six month results to 30 June, SJP said its fund management business earned profits of £175 million before tax. The key for the group is to grow assets under management and retain clients in those funds for as long as possible.
The company currently has £83 billion under management. A measure of how profitable this business is for the company is contained in the interim report which says that ‘the net annual management fee retained by the group is c 0.77% post tax’.
But getting the money in does cost SJP. It says in the interim report that ‘around half of our new business does not generate net income in the first six years’.
So for example in the most recent six month period the group got in £6.87 billion. This cost it £33.3 million. However, it believes that the ‘post-tax present value of expected profits’ from this money will be worth £282 million
Some specialist managers chosen by SJP do command higher fees. For instance, Majedie Asset Management’s earnings amounted to 0.67% of the SJP UK Growth fund compared to SJP’s 1.37% (£1.9 million and £4 million respectively).
On SJP’s UK Income fund, Majedie made £2.3 million (0.53%) and SJP made £5 million (1.16%).
The biggest winners in terms of percentage fees were S. W. Mitchell, whose earnings represent 0.71% for running the £329 million Continental European fund, compared to SJP’s 1.44%.
Read our full findings here.
SJP clients are happy, according to the company’s own surveys. It uses a highly specialised consultancy in Stamford Associates to help it find, monitor and bring to market some of the best fund management talent in the world. When Mark Weinberg decreed SJP needed to be ‘open architecture’ he came up with a very good investment proposition and a real money making machine.
There is no harm in making profits. The question will be whether the clients are getting value for money. The FCA has its sights set firmly on this issue and is going to look at vertically integrated businesses like SJP. You could argue that SJP using its clout in the market to keep asset management fees down would be something the FCA supports. However, the FCA might want to dig up the latest accounts of Stamford Associates which show turnover of just under £12 million, which largely derives for the work it does for SJP. And it might then compare this to the £700 million in fees SJP earned.
Of course SJP does much more than use an external consultancy. What our research does do is shine a light on the whole value chain. What can be learned from it? That the closer you are to the client, the more control you have over charges. And the more of the value chain you own, the more money you can make. The platform business, with a handful of exceptions (such as Hargreaves Lansdown, AJ Bell and Transact) is a difficult place to make money. But if you can package in advice and asset management, along with the facility to switch out of underperforming managers, then SJP demonstrates just how profitable this can be.
At the end of the day, the question we always need to ask is: is it good for the client?