The UK is one of the leading global financial centres, but its regulations – although world-leading on some fronts, most notably in the case of the RDR – have often underserved investors in funds. A few examples of past and current weaknesses might include:
- The disclosure of fund managers’ names is not required;
- The disclosure of portfolios’ investments is required only infrequently;
- The absence of a centralised public online repository for fund regulatory documents.
To put this in context, it might be helpful to examine the situation in other markets to provide a yardstick by which to measure ourselves. Morningstar undertakes a comprehensive study of 22 national fund markets around the world every two years – in the most recent study (released March 2011), the UK received a grade of C+, with C the middle grade on an A (best) to F (worst) scale. For a leading market, this grade is not a badge of honour.
Here are some changes we at Morningstar would like to see implemented in the UK to ensure the industry improves:
Manager Disclosure
This might not sound important given that many companies voluntarily disclose the name of the fund manager, but not all fund firms do so and a regulated requirement further ensures that start and end dates are accurate and the investors are promptly notified of any change. It shifts from allowing the asset manager to determine if and when to notify investors of the fund manager’s identity and any manager change to ensuring that all investors receive timely and accurate information on both fronts. Few can imagine a corporation being allowed to simply cite “management team” instead of naming its chief executive, but funds can.
The UK is not unusual in its laxity here, but other markets have done more. According to the Morningstar Global Fund Investor Experience 2011 report, China and the US require manager names and tenures to be disclosed. Canada, India, Sweden, and Thailand all require disclosure of manager names but not details of their tenure.
Portfolio Disclosure
It goes without saying that complete disclosure of portfolio holdings is a necessity. If you don’t know what you own, you cannot monitor the exposures to risk in your investment portfolio. The UK falls in the middle here. As with most markets, it requires funds to publish full holdings twice a year, but permits a lag of up to 120 days after the end of the tax year for investments held at the end of the year, which is generous. Moreover, the UK lags Spain, Sweden, Taiwan and the US, all of which require quarterly disclosure of complete portfolio holdings. Many funds in the UK voluntarily disclose holdings more frequently than is required, which is good for investors, but a clear requirement would be preferable as it ensures all investors have access to the same level of timely information.
Central Repository
One of the most important aspects of funds’ regulatory disclosures is to provide an accessible central online repository where documents can be accessed and compared without charge. Otherwise, it is exceedingly difficult for investors and advisors to access this information quickly and easily. The best such sites also maintain an archive of all past documents for a fund, which helps ensure that investors can track how it has changed through time. Only eight of the 22 markets covered in the Morningstar Global Investor Experience Report lack such a repository. Sadly, the UK is one of these eight.
On the whole, these weaknesses make it much harder for investors to research funds in the UK than needs to be the case. Although solutions devised by the market are generally better than regulatory ones, a market functions best in the presence of access to complete information.
Read a related article by Traulsen about how the asset management community should adopt clear, consistent labelling practices for share classes. This labelling would account for intended audiences, fee structures and currency.
The original version of this article was published in Investment Adviser, part of the Financial Times Group.
