Latest study suggests trustees should revisit their investment strategies.

The Financial Conduct Authority’s (FCA) latest report suggests that the season of goodwill does not extend to the asset management industry. The “asset management market study” examines the performance of UK fund managers, shining a spotlight on fund charges, fund performance and competition. The results are scathing, concluding that the £7 trillion industry is failing to deliver an adequate service to its investors.

In summary, the FCA’s main points are these:

Actively managed funds offer limited competition on price. The implication is that investors often pay over the odds, and the costs are not justified by higher returns.

The sector shows a high degree of ‘price clustering’, with the implication being that actively managed funds are too expensive.

Passively managed funds generally offer better performance with lower fees.

Fund objectives are not always clear.

Economies of scale are often not passed on to the consumer.

Performance is not always reported against a suitable benchmark, making it harder for investors to know if they are truly receiving good value.

The FCA has zeroed in on what it perceives as a lack of transparency. It is hard for investors to tell whether the fees they are paying for actively managed funds are justified. Taken together with the industry’s high profits and the clustering of prices, the insinuation that hangs over the report is that investors are being exploited.

The report’s potential impact is far-reaching. Trustees in particular, need to be confident that the funds they invest in are truly as suitable as they appear to be, or they themselves risk accusations of not fulfilling their duty of care. It is vital that they receive proper advice from an investment professional when reviewing the trust’s assets in light of the FCA’s new findings.

The scathing criticism of actively-managed funds, and their unfavourable comparison with passive funds, should prompt investors to review their investment strategies. The report’s claim that the fees incurred by actively-managed funds are ‘not justified by higher returns’ will herald a significant shake-up in how individuals, trustees and pension funds choose to invest. In particular, the FCA’s finding that a market-tracking passive fund could outperform an active one by 44 per cent over 20 years, due to lower charges, is damning.

In our experience, actively managed investment solutions lead to less predictable and less consistent fund performance.  Just because portfolios can be frequently changed to react to prevailing market conditions, it doesn’t mean that they should be. It is not easy for an actively managed fund to consistently outperform the market as a whole, but its increased levels of fees (relative to a passively managed fund) will definitely create a significant drag to the fund’s performance. It is important to always keep an eye on the big picture and remember that we are investors, not speculators. As unfashionable as it may sound, the most consistent method for delivering steady, risk-controlled returns is to choose a low cost, diverse long term strategy and then stick to it.

At Provisio, we have employed this strategy since 2008 and have built up a track record of delivering consistent, risk controlled investment returns. By focussing on long term asset allocation weightings and aiming to keep fund costs as low as is reasonably possible, we tend to outperform most actively managed funds over most investment periods. Of course, such performance can’t be guaranteed in the future, but it is reasonable to expect that this method is likely to deliver suitable returns for long term investors. As such, trustees should seriously consider low cost passive strategies for their assets.

The traditional premise that active fund management will deliver superior investment returns has been proved to be folly. Active funds may or may not perform better than passive funds, but they will definitely cost significantly more.  The quandary for investors is knowing which actively managed funds are worth paying for and which are not. This is a problem that  even the three wise men would find challenging to overcome. One solution would be to ask Father Christmas for a time machine. Another would be to seriously consider low cost passively managed funds when reviewing investment strategies.

 

Philip Bailey

pbailey@provisio.co.uk

Provisio Wealth Management

 

IMPORTANT INFORMATION

WHILE A REASONABLE COURSE OF ACTION REGARDING INVESTMENTS MAY BE FORMULATED FROM THE APPLICATION OF OUR RESEARCH, AT NO TIME WILL SPECIFIC RECOMMENDATIONS OR CUSTOMISED ADVICE BE GIVEN, AND AT NO TIME MAY A READER BE JUSTIFIED IN INFERRING THAT ANY SUCH ADVICE IS INTENDED. ALTHOUGH THE INFORMATION CONTAINED IN THIS DOCUMENT IS EXPRESSED IN GOOD FAITH, IT IS NOT GUARANTEED. PROVISIO WEALTH MANAGEMENT WILL NOT ACCEPT LIABILITY FOR ANY ERRORS OR LOSS ARISING FROM THE USE OF THIS DOCUMENT.