The FCA’s study of the fund management industry

The Asset Management Market Study, released by the Financial Conduct Authority (FCA) has made interesting reading for us but it could be a little more scary for investors in actively-managed funds!

The FCA’s aim is to “ensure that the markets work well and the investment products consumers use offer value for money. Improvements in value for money could have a significant impact on pension and savings pots. Even a small difference in charges can have a big impact over time”.

We’ve summarised their key findings below:

• The study discredited the Investment Association’s (IA) own recent research paper, “Hidden Fund Fees: The Loch Ness Monster of Investments?” which looked at hidden transaction costs for active and passive funds. These costs include the buying and selling costs of the underlying investments within a fund, amongst other things. The FCA notes that the level of turnover of these transactions in active funds can be as much as 100%, whereas the IA paper above stated the “asset weighted average across all equity funds is 40%”.
• The FCA’s paper acknowledged that the transaction costs are often hidden and that investors therefore can’t assess the full cost of investing when making their initial investment decision. These costs can be high, adding around 0.50% on average to the cost of actively-managed equity funds.
• Investors often think that if a fund is expensive, it’s because the fund manager has provided consistently high returns. This however isn’t the case and there’s a wide range of academic evidence to back this up. The FCA’s analysis indicates that “while there is no clear link between price and performance, on average the cheapest funds generated higher returns (both gross and net) than the most expensive funds”.
• The FCA found that active funds underperformed their benchmarks after charges on an annualised basis by around 0.60%.
• On funds that do outperform their benchmarks for a period, there’s little evidence that this is persistent, “but there is some evidence of persistent underperformance”. Stating that “asset managers are more likely to close or merge worse performing funds”, they also highlighted that when these active fund managers report their past performance, they’ll likely disregard any closed or merged funds, making their performance look more favourable (the survivorship bias).
• The study slams so-called ‘best buy’ lists that investors often refer to when picking an investment fund, noting that “after costs, these funds have not outperformed their benchmarks”

The full 200-plus page document is freely available on the internet for those with interest to read it all! Many of the findings back up the work our Investment Committee has undertaken since 2009 and re-enforces that our investment methodology continues to be appropriate.

Overall, this is a damning report on the active fund management industry, telling a story of high or hidden costs and underperformance against benchmarks.

Past performance can’t guarantee what investments will do in the future, there’s more to it than that. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.