This week IG announced that it was reducing the management fees it charges on the smart portfolios to just 0.50% per annum, and it also capped those fees at £250.00 a year.
IG Group is probably best known as a provider of margin trading services be that FX, CFDs or Spread Betting, but that company also acts as a stockbroker and fund manager and it provides the latter service in conjunction with one of the world’s largest asset managers, Blackrock.
Blackrock helped the IG create a series of five smart portfolios offering investment styles that range from conservative through to aggressive
What does this mean for those investing in IG’s Smart Portfolios?
For those investing more than £50,000 into the portfolios IG will waive the management fees entirely
The five IG smart portfolios which were launched a little under three years ago at the end of February 2017. Four of the five funds replicated existing BlackRock products but the fifth, the aggressive portfolio, was created specifically for IG, by BlackRock.
BlackRock is best known as an originator of ETFs and other passive investments however the products it produced for IG are not index trackers
Rather, they are what is known as smart beta funds. Smart beta is an investment style that tries to benefit from idiosyncratic features associated with particular groups of stocks this is also known as factor investing. These factors or characteristics include traits and identifiers such as value, growth, momentum, size, low volatility and others.
Why would IG reduce charges on Smart Portfolios?
The thinking behind this approach is that by identifying and isolating these factors we can create portfolios which could outperform or are uncorrelated to a broad market basket.
This is the type of strategy that Hedge Funds might employ.
Smart beta portfolios such as those offered by IG stockbrokers aim to bring these quantitative and qualitative investment approaches to their clients, via low-cost vehicles
IG can boast positive overall returns among the five funds since inception. Though there was a -6.50% drawdown in the aggressive portfolio in 2018, doubtless caused by the sharp selloff in the markets at the end of that year.
Despite this positive performance the fund management business has not caught the imagination of the IG client base in the same way that say trading CFDs or Spread bets on equity indices have.
For example, in the FY 2019 margin trading clients generated revenues of £454 million pounds for IG, whilst the investments and stockbroking division returned revenues of just £5.9 million. A positive result but a drop in the ocean when compared to the margin trading business.
Since the departure of former CEO Peter Hetherington IG has made no secret of its desire to broaden both its product range and customer base. It has recently recruited both a new chairman and a head of institutional business, with that in mind.
The reduction in fees, and in some cases the removal of them altogether, in the Smart portfolio’s business is doubtless aimed at growing both funds under management and annual revenues.
Welcome though this cost reduction is, we can’t help but feel that the existing funds IG offers are somewhat staid when compared to what’s available elsewhere and the type of products and trading the wider group is involved in
IG would surely be able to attract money to funds that replicated or in some way participated in the firm’s own trading book
After all the business takes no directional view on the market but rather hedges customer flows, once the firm’s risk reaches certain predetermined levels.
You can count the number of losing days that IG experiences in a year, on the fingers of one hand and surely that’s the kind return that people would be prepared to pay up for.