In November the Financial Conduct Authority (FCA) released its latest review and this time it has focused UK Fund Management industry practices and how these can impact customers; i.e. you and me. The report is not good reading for the industry and some commentators are urging the FCA to take further action against the morally questionable activities employed by UK fund managers.
The FCA reports that:
”Overall, our evidence suggests that actively managed investments do not outperform their benchmark after costs. Funds which are available to retail investors underperform their benchmarks after costs – while products available to pension schemes and other institutional investors achieve returns that are not significantly above the benchmark. Investors may choose to invest in funds with higher charges in the expectation of achieving higher future returns. However, we find that there is no clear relationship between price and performance – the most expensive funds do not appear to perform better than other funds before or after cost”
Here at Swindells Financial Planning, we have always understood that higher fees do not mean better performance and this is entrenched in our investment philosophy. Furthermore, we have always been wary of the claims from ‘active’ fund managers that they can consistently and effectively outperform the market. The FCA now agrees with us.
On giving clients fairly priced access to markets the FCA found that:
“…once assets under management are greater than around £100m prices do not change significantly based on the number of assets under management. This implies that any fund level economies of scale do not get passed on in lower charges to investors”.
So, whilst in the index and passive fund arena, we are seeing that competition is leading to reductions in fund charges; for active managers this is not true. Any cost savings made are pocketed by active managers and not used to improve outcomes for their clients. One industry commentator has said that this effectively means cartel like pricing for active funds. In commenting on investments provided on a non-advised basis:
”We analysed whether best buy lists help investors identify funds that will outperform their benchmark. Our analysis of the performance shows that net excess returns of share classes on best buy lists were not greater than their benchmarks. Share classes on these lists achieved a net performance with little or no significant excess return over benchmarks”.
This highlights the need for advice and help in implementing an appropriate investment strategy rather than relying upon a list with little value. Independent research carried out in February 2016 found the just one in ten funds named on such best buy lists three years ago ranked among the best performers since appearing on these lists.
The FCA also slammed many other industry practices such as providing misleading pricing and performance information, the perils of closet tracker funds (which we highlighted back in 2014) and numerous conflicts of interest within the industry.
Advice on your investments is therefore essential and could prove priceless.
Swindells Financial Planning has helped numerous clients put in place investment plans and strategies and we are always here to answer any questions you have.
So please give us a call on 01825 76 33 66 or fill in the contact form.