Interactive Investor

Fund managers ‘still have work to do’ when marking their own homework

Assessment of value reports from fund groups are having a positive effect, but the regulator says there is still room for improvement.

10th August 2023 12:19

by Sam Benstead from interactive investor

Share on

The Financial Conduct Authority (FCA) has found that fund managers still have room for improvement in terms of how they assess the value they offer to customers and what remedial actions they take.

The City watchdog requires fund groups to carry out an annual “assessment of value” report for their fund range, considering factors such as performance and fees.

Introduced in 2019, the FCA found that companies were getting better at marking their own homework and making positive changes for customers, but there was still room for improvement.

It noted that value assessments “significantly improved”, but there was “still work to do”.

The FCA added that many firms had taken remedial action when poor value was identified, including some reductions in fund fees, typically by a few basis points. One basis point is 0.01%.

“Overall, this amounted to savings for fund investors of millions of pounds. We also saw some firms move investors in pre-Retail Distribution Review (RDR) share classes to 'clean’ classes with no trail commission. The savings for these investors were even more significant,” the FCA said.

However, while the watchdog found firms had a better understanding of the need to justify fees, most remedial action did not involve cutting funds’ fees.

“Where fees were cut, the share class fee reductions were almost always driven by adverse comparable market rate findings rather than other considerations,” it said.

This suggests that fund managers continue to “cluster” around price points identified, which could be considered a market failure. Some firms cited erroneous operational or regulatory barriers to reducing fees, the FCA noted.

It said there were tensions between maximising profits on popular funds and cutting fees in the interest of customers.

“Firms that fail to make reasonable decisions to deliver good outcomes will likely fall short of the standards expected to comply with our rules,” the FCA said.

One fund group that took action recently was Baillie Gifford. It shut the £141 million British Smaller Companies fund after a sustained period of poor performance.

Baillie Gifford said the fund was closed because investment performance had not met clients’ expectations over the long term and investor demand for the sector and the fund itself had been weak for a number of years.

On 31 July 2023, the FCA’s Consumer Duty came into force. It requires firms to act to deliver good outcomes for retail customers. This means that fund groups will be under great pressure to deliver fair value.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Get more news and expert articles direct to your inbox