Industry body the Assocation of Professional Fund Investors has responded to the UK Fincancial Conduct Authority’s suggestions around costs and transparency in the fund industry with a cautious welcome, and a reminder that there are a number of additional factors that the regulator ought to consider on the issue.
Issuing a statement on behalf of the APFI membership, which includes professional fund buyers across Europe, the Association said:
“The Association of Professional Fund Investors (APFI) welcomes the FCA examining this area of great interest on behalf of fund buyers and customers. The APFI supports greater transparency relating to the costs of fund management and how they impact customer outcomes.”
“However the APFI is keen to remind the FCA that many of the issues arising in fund management relate to the structure of the Annual Management Charge (AMC), which when combined with the effects of the Retail Distribution Review encourage fund managers to continue to grow in size to replace margin with scale and increase their portfolio running costs to service ever larger funds. This has distorted the market through marketing, asset concentration and consolidation. In order to have full transparency in this discussion we need to consider the input costs of managing funds, the regulatory pressures and the impact of asset concentration on free competition.
“The APFI also notes the interim report focussed specifically on investment consultants rather than the wider professional fund investor (‘PFI’) universe, which we believe may have skewed FCA’s analysis. Many PFIs are more closely aligned to the end customer, offer varying expertise in fund selection and allocation and will have a range of success at negotiating fund fees.
“Most funds that still exist today relate to a time when commission and marketing weighed heavily on some buyers’ decisions. Meanwhile the APFI has championed the value of professional fund investing and we believe that the variable quality of fund investing across markets has impacted the assessment of active versus passive funds. This is particularly so amongst the large aggregated studies (eg, SPIVA), which take no account of buyer segment, expertise or process. It is true that many active fund managers today underperform the market just as many outperform. As the global asset management market has grown it has effectively become the market. Consequently many PFIs increasingly use index-based products for access to market beta. To this end the APFI must approach the issue even-handed wherever possible while reflecting the views of our members.”
UK Representative for the APFI, JB Beckett added: “If we expect competition and skill as a necessary pre-determinant for ‘alpha’ then we would expect more active funds to underperform that outperform over a prolonged period. Analysing markets and investing is not easy but index products do convey that illusion and this deteriorates the perceived economic value of active management.”
“Likewise selecting good managers that are consistent and competent is not easy. Here the value in professional fund selection, diversification and switching should add value net of fees to the end investor. However supportive evidence for active fund selection remains scarce, anecdotal or privately guarded. We encourage APFI members and other professional fund buyers to demonstrate the value added by sharing their experiences, to respond to the FCA consultation, share best practice, median costs and value added over benchmarks. We believe that forum should extend to all quarters of Professional Fund Investors (PFIs), not solely investment consultants.”
The Association continued: “The APFI broadly welcomes the interim FCA proposals, which should engender greater transparency of fund charges, assuming an even approach is applied to active and passive funds and captures the variation in share classes and fund charges at the fund level. These proposals should involve all impacted parties including professional fund managers, investors, consultants, consumer groups and rating agencies.”
“We will feedback to the consultation in due course. The APFI calls on the FCA to consider the broader professional fund investor (PFI) universe and take evidence from a wider sample rather than specifically investment consultants, and whether; business models should be reviewed, supportive empirical evidence of active funds exists, universal market standards are required and certification be considered.”