|In 2017, Damian Gawlowski, a South Africa insurance contractor based in the City of London, uncovered the hidden impact of intermediary fees with the more risk an investor took on|
|In the Financial Times’ report on Innovation in South Africa today, Aziza Coin simulates how to beat high fees and shows why “excessive profits in UK fund management industry handicap growth on the African continent.”
In 2017, Damian Gawlowski, a South Africa insurance contractor based in the City of London, uncovered the hidden impact of intermediary fees with the more risk an investor took on. Up to 78% of returns from private equity are consumed by intermediary fees. Gawlowski investigated and found that while this was the case, the underlying equity and bond returns were over 4% rather than the 1% he actually received. Undisclosed fees added, he calculated, made intermediaries consume over three-quarters of the underlying returns generated by the bond portfolio that was ultimately invested in. Gawlowski considered putting his pension into higher risk investments such as private equity funds and as the mutual fund returns resulted in real depreciation of his pension by 1.3% per year after fees. He modelled a dummy private equity portfolio where he calculated that the portfolio would need to make 140% over a typical seven-year period simply to cover the fees and to keep up with inflation. This meant that an (annualised) internal rate of return of 13.3% would be required to simply retain his 2017 buying power by achieving UK inflation of 2.7%. *
The Financial Conduct Authority has expressed concern about the level of fund management profits when it was quoted as saying in a report lambasting the statutorily-protected revenues of the United Kingdom’s £6.9 trillion fund management industry’s’ profit margin of 36%. It found that “firms do not typically compete on price with their retail active funds in the UK [and that] there is some evidence of a negative relationship between net returns and charges.” **
These fees, which the FCA regards as excessive, have real societal costs. As Einstein is alleged to have said, compound interest is the most powerful force in the universe. A pension that appreciates by 13.3% per annum (ie gross returns without the 78% intermediary fees will return 140% in seven years time, whereas with the fees added, an annual return of 2.7% will only appreciate by 20%. These fees have already broken the defined benefit company pensions system and has the potential to cause real poverty in the Western world, where their effect is not well understood by the general population. The fact that the UK financial services PR industry is worth £2 billion per year does not help. Furthermore, if the fund management industry is taking three-quarters of returns, with 40% of funds disappearing upfront, it becomes distinctly more risk averse, as any loss of retail investor capital will invite scrutiny and therefore shed light on the level of their fees.
This risk aversion is manifested in the fact that 0.02% of assets under management or only 8 billion Euros were allocated to startups in 2016. This matters since start-ups create more jobs than the rest of the economy combined. Pre-ICO, Damian invested in the Aziza Project, which seeks to use distributed ledger technology to automate and disintermediate the layers of fund management costs. The Project was careful to avoid the usual pitfalls that have beset other cryptocurrencies:
Aziza Coin offers something that excites Damian more than reducing the fees. He has starting working on Acqumine, which has had discussions with the South African Revenue to internalise commodities taxation into a smart contract and eventually a pan-African commodities exchange that will enable host countries and local communities in the developing world to receive royalties due to them, while giving end customers piece of mind as to the true source of the minerals that make up consumer goods they buy.
Based on IFA trail commissions of 3% upfront plus 0.5% per year, pension fund fees of 1.o% per year, fund of fund fees of 1% per annum and 10% profits and private equity fees of 2% per annum and 20% of profits on exit. Based on a dummy portfolio of five investments delivering an average of 140% over a seven year period.