A new dawn
Last month the Financial Conduct Authority (FCA) published its deep dive into the UK fund management industry. The detailed report pushes for an overhaul of charging structures as the regulator seeks a better deal for investors.
The 200-page report underscores a long-standing debate over the value provided by actively managed funds. The report found:
- Limited price competition for actively managed funds, means investors often pay high charges.
- On average, these costs are not justified by higher returns.
- There is no evidence that economies of scale are passed back to investors.
- Stronger price competition for passive/tracker funds, although there were also examples of poor value too.
- Platform ‘best-buy’ selections typically fail to beat the market once charges are taken into account.
First of all, one shouldn’t be surprised that most active fund managers fail to beat the index over the long term (after costs). With markets more efficient than ever it’s not easy to pick a winning share – particularly over a longer period of time, even before one accounts for the hefty drag of fund costs. At EQ, our default choice for large stocks in major developed markets is often a passive fund.
It’s easy to say that all but the most sophisticated investors should invest in index funds. And reading between the lines, the FCA believes this as well. But some areas of investment are better suited to active. An active manager might be useful in more specialised areas, like healthcare, smaller companies or impact investing, where fund manager expertise and engagement can help to seek out value.
From recent evidence it appears that investors are already focusing more on what that are paying. Assets managed in passive funds have grown four times faster than traditional active products since 2007 and now stand at $6tn globally, according to Morningstar. Indeed, we’ve seen a surge of interest in our own low-cost portfolios.
The report also found that a key focus for retail investors and, to some extent, institutional investors when choosing between asset managers is past performance. Numerous academic works have shown that simply looking at past performance is next to useless in terms of predicting the future. We have developed a bespoke screening system to make sense of the numbers and weed out managers who show no evidence of skill.
As for ‘best-buy’ lists, this taken from one major platform, says it all: “We believe these funds offer the ultimate combination of first-class performance potential and low management charges.” Just to recap, they also typically fail to beat the market.
The FCA has put forward proposals to kick-start competition and reduce costs for investors, including:
- A strengthened duty on asset managers to act in the best interests of investors.
- An all-in fee approach to quoting charges so that investors in funds can easily see what is being taken from the fund.
- A requirement for clearer communication of fund charges and their impact.
Increased governance, transparency and further safeguarding of investors interests should be welcomed by all concerned. The FCA will consult with the industry on the proposals until February 2017. Its final ruling on the asset management industry is expected in the first half of 2017. With MiFID II also waiting in the wings, expect to see a progressive approach to costs disclosure sooner rather than later.
» If you have any questions about the above, please do not hesitate to contact us.