Fund groups are falling short when it comes to assessing the value of their funds, the regulator has warned. The Financial Conduct Authority reviewed 18 funds managers between July 2020 and May 2021 to see how the implementation of so-called Assessment of Value (AoV) reports was progressing, and found that many firms were not doing enough. AoV reports were brought in last year and require firms to assess at least annually whether their funds are providing value for money.
The FCA says that while some firms have been conducting the assessments well, many were not: “When considering a fund’s performance, many firms did not consider what the fund should deliver given its investment policy, investment strategy and fees.”
The FCA said other firms used “poorly designed processes”, such as failing to assess fund performance or the cost of different unit classes. The FCA said it expects more rigour from asset managers in assessing the value of their funds and wants them to make changes to address shortcomings where necessary.
The regulator plans to review firms again within the next 18 months to see how they have responded to its feedback.
However, the introduction of AoVs has not been without its successes and a number of firms have produced well thought out reports that have led to changes that have improved investor outcomes. Rathbones, for example moved 1,982 investments into cheaper unit classes, saving investors between £6.25 and £10 a year on every £1,000 invested. The firm also removed initial costs from its entire fund range.
Moira O'Neill, head of personal finance at interactive investor, adds: "Schroders has simplified its charging structure, after finding that nine out of 86 funds had not demonstrated value in its first set of reports, and BlackRock, the world’s largest asset manager, moved 14,000 investors into cheaper share classes last year, delivering savings of £3 million."
Lengthy Reports, Shortage of Data
The FCA is not the first organisation to have delved into the success of AoV reports. Earlier this year, trade body the Investment Association looked at 1,500 funds covering £800 billion of assets under management to see how successful the implementation of AoVs had been. Notable among its findings were the varying lengths of the report, which ranged from one page to 400 pages, and the lack of performance data or fund objectives provided by some funds. The IA said firms needed to do more work to make their reports accessible, and noted that it had been unable to find around 11% of the reports it sought on the company website.
Trade body CFA UK conducted a similar study, and had difficulties in finding around 25% of the reports. The CFA’s Andy Burton said at the Morningstar Investment Conference that more visual explanations and pounds and pence examples would help investors better understand the reports. He added that firms must also put a greater focus on ESG and liquidity.
Andy Pettit, director of policy at Morningstar, says: “Misinterpretation or non-fulfilment of specific rules is a concern, such as only analysing one share class or evaluating costs against an arbitrary benchmark. The examples of sub-optimal approaches to costs and economies of scale appear to indicate that the problem that AoVs were designed to solve – that is, non-competitive outcomes for investors – has not been fully embraced.”
Pettit adds: “Despite the downbeat findings, AoVs are still a positive piece of regulation overall and has already delivered significant wins for investors with some firms transferring investors into lower cost share classes, reducing fees or closing poorly performing funds. The FCA’s analysis will hopefully provide more guidance to those firms who need it, while the better reports out there will also serve as good examples to help evolve best practice.”
