The Association of Professional Fund Investors (Apfi) has responded to the UK Financial Conduct Authority suggestions for changes to the way fees and other factors in the asset management industry work, by noting that the final observations are “broadly consistent” with the interim report findings, and that any work to improve transparency relating to fund management costs should be supported.
The technical name for the final report, MS15/2.3 refers to findings made in the interim report MS15/2.2, which was published in November 2016. Apfi responses to the interim report (see: http://www.investmenteurope.net/regions/uk/apfi-responds-to-fca-interim-report/ and http://www.investmenteurope.net/regions/uk/apfi-spots-2-7trn-uk-managed-assets-jeopardy-fca-response/) noted certain concerns, such as the fact that the majority of funds currently in existence in the UK come from a time when commission was a weighty factor in many buyers’ decisions.
Such concerns remain, notwithstanding the Apfi welcome of specific proposals in areas such as bringing investment consultants into the FCA’s regulatory remit, and proposals around fund governance. Apfi will also respond fully to the consultation announced by the FCA, CP17/18, which relates to the issues discovered in the interim and final reports.
Meanwhile, in its immediate response to the final report, Apfi added that: “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, to $42trn globally according to latest estimates, it has effectively become the ‘market’, which is in stark contrast to pre Big Bang or Erisa in the US. The market continues to mature. Today many PFIs [professional fund investors] increasingly use index-based and specific Beta products to access targeted parts of the market. To this end Apfi must approach the issue even-handed wherever possible while reflecting the views of our members.”
“Our overall view of the FCA’s response is therefore supportive but on FCA’s conclusion have concerns that not enough PFIs submitted sufficient evidence to balance the conclusions from broad index studies (mostly by passive providers) in relation to active funds. The FCA’s observation remains that on average, both actively managed and passively managed funds did not outperform their own benchmarks after fees. This finding applies for both retail and institutional investors. The FCA continues to note ‘little evidence of persistence in outperformance’ in academic literature, and where performance persistence has been identified, it is persistently poor performance. Apfi welcomes the recognition for good investment fund governance and benefits of harmonising market standards and fiduciary obligations covering; all investment consultants, gatekeepers and professional fund investors. We believe such standards should also extend to all fund rating agencies, insurance providers, distributors, workplace pensions and platforms. Therein;
A. Apfi continues to promote professionalism and accreditation in fund selection and the FCA is right to investigate the competency of those incumbent in senior decision-making roles, influencing roles and committees.
B. Apfi again reminds the FCA that profit margins are not evenly distributed across the industry and that asset concentration within the UK industry (and globally) continues to hurt competition at the detriment of smaller boutique firms. The FCA is encouraged to investigate this, assess different business models, consequences of the Annual Management Charge (AMC) model versus those employing more innovative performance-based fee structures such as a symmetrical AMC. In our opinion the FCA has not fully considered the efficacy of the AMC model, which is the dominant model used by active and passive asset managers.
C. Apfi believes that the legacy of commission, marketing and poor fund selection has ostensibly driven poor outcomes between charges and gross performance but is not necessarily representative of that relationship among funds held and selected by professional fund investors. However, Apfi recognises that the onus is on [its] members and PFIs to provide that evidence.
D. Apfi asserts that activist groups and regulators continue to assess persistency of outperformance over relatively short time periods and/or fail to consider compounding and magnitude of XS gains over losses relative to benchmarks and the relative riskiness and invest-ability of the benchmarks.
E. Apfi asks the FCA to clarify its observation around net outcomes and distinguish those outcomes between high cost legacy funds versus higher cost funds currently marketed and bought. If we expect competition and skill as a necessary pre-determinant for ‘alpha’ in active
management then we would expect more active funds to underperform, than outperform, over a prolonged period.
F. Apfi is supportive of further work around ‘active’ funds with very low tracking errors, being put under pressure to either; reduce fees, close or restructure. We note the risk of further asset concentration arising from consolidation of these funds.
G. Apfi notes its members are among the best examples in terms of negotiating fees with asset managers and welcomes engagement with the FCA on this matter. PFIs are often on the frontline in terms of bringing fund costs down.
H. Apfi notes that institutional investors often struggle to negotiate fees with asset managers due to a lack of expertise or understanding of capability or choices within a given sector. This may be due to an over-reliance on a) decision by committee and b) investment consultants.
I. Apfi notes the equal potential for good and bad market practices arising from a concentration within the investment consultant market. Fiduciary accountability, fairer competition for smaller consultancies and best market practises. We agree that potential conflicts of interest can arise among investment consultants that also launch fiduciary asset managers and pressure distributors to add those funds to their platforms.
J. Apfi supports better application of PFI approaches and fund governance among Direct to Consumer platforms.
K. Apfi supports improving competition, transparency and market standards in the UK asset management industry and in relation to professional fund investing.
L. Apfi supports the increased duties for asset managers, including value for money, which should be reflected through the value chain to include distributors, research agencies, gatekeepers and consultants. Easier share class switching should facilitate better Mifid II integration.
M. Apfi supports greater cost transparency can help drive better outcomes. This needs to be done in context to bundled fee pricing, which can be counterproductive and costs not reflected in the NAV.
N. Independent governance structures require more than non executives and requires more immediate contact between Independent Governance Committees and fund selection and governance professionals.
O. Apfi supports fairer return of revenues and costs to fund investors, including Box profits and stock lending revenue, which is a large profit contributor for passive fund providers.
P. Apfi asks the FCA to review asset managers retaining retrocession post end of the sunset clause, which on average may be worth 30bps to investors.
Q. Apfi notes that for PFIs, transparency and breakdowns of the all-in-fee will be necessary to facilitate meaningful cost negotiations absent of transparent clean price points and abolition of rebates.
R. Apfi supports the FCA in respect to standardised disclosure of costs, which should be distinguished between Retail and institutional investors whereby they are PFIs.
S. Apfi supports professionalism in fund investing and part of this includes investment consultants. Apfi recognises industry forces around consolidation but concentration of fund advocacy and investing may drive poor outcomes. Apfi supports the FCA’s referral to
the Competition Markets Authority (CMA).
T. Apfi fully endorses the FCA’s proposal to the Treasury to bring investment consultants into the ‘regulatory perimeter’. Apfi suggests the FCA should consider benchmarking the practices of fund ratings agencies, consultants, insurers, DFMs and multi-managers. That study might include the approach to performance data, due diligence, judgemental factors, value for money, ratings models and biases arising.
U. Apfi welcomes further focus on investment platforms in terms of fund governance, due diligence, investing and competition.
V. Apfi broadly welcomes the FCA’s focus on ‘Fund Gatekeepers’, recognising their growing influence on manager selection (et ‘guiding community’).
W. Apfi agrees with the FCA’s observations re fund flows and performance, this may point to poor selection practises and effect of sales and marketing.
X. Apfi urges the FCA to consider carefully any action that encourages investors to churn portfolios, thereby generating costs and crystallising losses following periods of underperformance.
Y. Apfi agrees that proliferation and expansion of the absolute return sector has resulted in deteriorating median outcome for investors. These funds are complex and beyond the capability of all bar PFIs.
Z. Apfi reiterates that competence in governance structures is fundamental to improving outcomes.”
” Apfi holds that identifying and selecting good managers, that are consistent and competent, is not easy. Here the value in professional fund selection, diversification and prudent switching should add value net of fees to the end investor. apfi looks forward to engaging with the FCA further with regards to this consultation. To support this we encourage Apfi members and other professional fund buyers to demonstrate the value added from professional fund investing by sharing their experiences, to respond to the FCA CP17/18 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. Apfi will engage members and respond to CP17/18 in due course.”
See below for additional reporting on this issue: