With a spotlight cast in search of greater transparency, disclosure, value for money and ultimately better outcomes for investors, the regulator concentrated on a few key areas.
It focused on the “closet tracker” argument that many actively managed funds were failing to deliver outperformance against their benchmark in exchange for their higher fees.
There were also concerns that retail investors in actively managed funds seemed to be worse off than their institutional or retail passive counterparts.
Others focused on the comparative lack of competitive pricing pressures in the active space versus that of passive fund management and whether that was a valid observation.
The FCA is inviting responses by February with a view to publishing a “final” paper in the second quarter.
Focus and urgency
Martin Gilbert, chief executive of Aberdeen Asset Management said he welcomed the report as it brought both a sense of focus and urgency to some key industry issues: transparency, cost, value, and ultimately the rise of confidence and competitiveness in the UK management industry, which is key for “making it more attractive on the global stage by leading the way in best practice.”
Similarly M&G said it was committed to meeting its customers’ needs, and welcomed the drive to greater transparency of costs and value for money.
A spokesperson said: “We are conscious of the need to align additional proposals on communication of fund charges to investors with existing initiatives, including UK asset management industry standards and European legislation which UK asset managers are required to implement.”
Further kneejerk reactions are that, with yet another review of pricing, was the Retail Distribution Review (RDR) with all its costs and administrative red tape really able to bring down the costs of active management?
Mike Barratt, consulting director at the Lang Cat, hit the nail on the head when he pointed to the part of the 208-page report showing the scale of operating margins in asset management.
That states: “economies of scale are captured by the fund manager, rather than being passed onto investors”, which he rightly calls “a damning indictment”.
RDR failings?
Ryan Hughes, head of fund selection at AJ Bell, said while progress is being made, there were several proposals worthy of greater consideration.
He points out that the report makes clear the unbundling of funds charges and the rise of the “clean share class” since the RDR had somewhat failed in one of its objectives.
He said: “One of the most interesting conclusions from the report is that the unbundling of fund charges since the RDR has had virtually no downward impact on active fund charges. The RDR was a success in many areas but there was an assumption that it would reduce the cost of active fund management and it didn’t achieve that.”
Downward pricing pressure
Friday’s FCA paper highlighted the reluctance of active fund groups to reduce charges in order to attract new money, but Richard Romer-Lee, managing director at Square Mile, disagreed.
While conceding he was still considering the entirety of the paper, he said he believed there were signs of downward pricing pressures in the active space as well, but it was early days.
“We all know the published rate is not what everybody pays. We are seeing various groups start to cut their fees on active funds in order to be more competitive. There is clearly a drive towards greater competition, innovation and transparency and that is sensible but we all have a part to play.”
Value for money
With £109bn ($134.5bn, €127bn) in ‘closet trackers’, there is clearly a huge number of private investors not receiving value for money, with the managers running those assets under a huge degree of pressure, according to David Morrey, partner at Grant Thornton.
He said: “We believe the FCA end game is not necessarily to drive fund costs down overall but rather to have greater price discrimination between funds with different strategies. That potentially will make life very difficult for active funds which are actually ‘closet index trackers’.”
On these “partially active” funds, Barratt added: “These investors are paying active management fees for little if any active management, which as the FCA reminds us ‘are considerably more expensive than passive funds’.
“Even the passive boys are not immune from criticism here, with £6bn invested in passive equity funds with an OCF equal to or above 1% for bundled or 0.5% for clean.”
Barrett noted that for a regulator that prides itself on its core principles of treating customers fairly to state, quite clearly, that “investors in these products are likely to benefit from switching to better quality, lower priced passive funds in the same investment category”, action was clearly needed.
Similarly, where a better deal was being sought through a cheaper share class, the process required to do so was blamed (by the asset managers) for its difficulty in switching – even if that would be in the best interests of investors.
This was said to be because investor consent was required to transfer and very few end investors actually had a direct relationship with their asset manager – and few end investors responded to communication when it was attempted.
That sounds like a bit of buck passing and one can understand why the FCA might feel the need for greater accountability.
About time?
David Ferguson, chief executive at Nucleus, breathed a sigh of relief as he read the paper.
While index tracking has trended down towards 10 basis points, and institutional active management sits around 20-40bps, the OCF on many actively managed retail funds still sits north of 90bps.
“More than that, the former two categories are more transparent and institutional management typically offers far stronger governance and greater accountability than the retail equivalents. And all that before we go anywhere near the dismal herding instincts of so many retail funds which purport to be active,” he said.
Having recognised the pricing pressures hitting the platform space in recent years, with some players bringing their costs down from 75bps to around 30-40bps, he hoped to see the same impact on the fund management space, and welcomed the ‘all-in’ fee and more transparent reporting requirements.
“Shining a spotlight on the true fee active managers charge retail clients means the days of 90bps funds – which are probably nearer 120bps when other fees and turnover costs are included – might finally be over now that there is a requirement to present an all-in fee. This will substantially reduce revenue margins and should give rise to better client outcomes.”
Binary tendencies
While polarisation in the asset management space is nothing new, be it small versus big, active versus passive or retail versus institutional, the drive towards scale, price-based competitiveness is not surely the only answer and some are concerned about the ever-increasing level of administration – a heavier burden for the smaller, more specialist and, perhaps actively managed groups.
Simon Turner, partner in EY’s wealth and asset management practice, said: “These changes should result in greater competition and increased consumer knowledge. They should also better equip consumers to make more informed investment decisions, and ultimately, better manage their finances.
“However, firms are already dealing with a growing volume of regulation, and this will add to a long to-do list, making prioritisation key. Particularly now, amid increased market uncertainty, the UK must remain competitive on the global stage.
“Price competition to drive value for money is positive and leading firms within the sector are already on this path, but care must be taken to ensure that it does not end up pushing smaller, boutique firms out of play.”
As managing director of a smaller group, Miton’s Gervais Williams believes there will be winners and losers, regardless of AUM.
He said while indexation has been a way of making a “extraordinary” amount of money for quite a long time, he feels the tide is about to turn, casting a shadow of irrelevance over the FCA’s paper.
Williams said: “We are look at a period of change, with political preferences and a change in economic policies and market trends. It has been all about indexation but I think that may be coming to an end and investors need to be attentive to the way they are making money and managing risk.
“I can see that when everyone was making a lot of money perhaps there was less shopping around taking place. But with such ultra-low bond yields the days of such good returns will be coming to an end and it will start to pay to shop around.”
