Jul 13, 2017 | EWAN ROSIE
The follow up to the Financial Conduct Authority’s (FCA) Asset Management Study has been released, meeting with mixed reviews from those in the industry who were hopeful they’d adopt a more direct and controlling approach over the dealings of active fund managers.
To re-cap, an active fund manager tries to outperform a benchmark index by timing when to go in and out of investment markets and/or using a stock-picking strategy. For example: a UK equity fund manager using these techniques to try and outperform the FTSE 100 Index.
However, academic evidence has shown that the majority of active manager’s returns simply fail to outperform their benchmarks over the longer term. So back in 2009, Cooper Parry Wealth took the decision not to use active fund managers, instead opting for passive, or index tracking funds.
The FCA’s first paper highlighted a number of issues with actively managed funds, in particular high or hidden costs, underperformance and how adverts in the financial media, such as ‘best buy’ lists, are actually detrimental to the consumer.
Our summary of that paper can be found here
In the follow up ‘Final Report’, the FCA has taken aim at the high charges active fund managers levy on investors suggesting that consumers aren’t getting value for money. They said, “there is no clear relationship between charges and gross performance of retail active funds in the UK” and that “there is some evidence of a negative relationship between net return and charges. This suggests that when choosing funds, investors paying higher prices, on average, achieve worse performance”.
It’s really pleasing to see the FCA back up a message that we’ve stuck by for years. But what are they actually going to do about it? Unfortunately, this is where the second paper lacks substance and doesn’t provide any solid solutions. Instead, they’ve made some suggestions and will follow up on these later in the year. They include:
Other interesting points to note from the follow up paper are:
Overall, whilst the messages presented by the study are positive, it lacks the clear direction that some had hoped for.
We’ll watch out for any concrete changes the FCA will look to implement in the future and hope that before then, active fund managers take note of the negatives, follow our example, and start putting investors first. That’s the most important thing.
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.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 14 August 19. You are recommended to seek competent professional advice before taking any action. The value of investments and the income from them can go down as well as up, and you may get back less than you originally invested. Past performance is not a guide to the future. The investments described are not suitable for everyone. This content is not personalised investment advice, and Cooper Parry Wealth can take no responsibility for investment decisions you may make as a result of this information. Tax and estate planning advice are not regulated by the FCA.
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