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Funds Must Prove Value to Investors

VIDEO: Andy Pettit, Morningstar's director of policy research, explains new rules which require funds to determine whether they are providing value to investors

Holly Black 30 September, 2019 | 10:03AM



Holly Black: Welcome to the Morningstar series, "Ask the Expert." I'm Holly Black. With me is Andy Pettit. He's Director of Policy Research at Morningstar. Hello.

Andy Pettit: Hello, Holly.

Black: So, you're here because today a new piece of regulation is coming in. And it means funds have to report in a different way. They have to prove they're providing value of money for investors. What's happening?

Pettit: So, this is the latest in a series of steps that the regulator, the FCA, have imposed on the industry. And you can trace them back three years or so to a market study that it conducted amid concerns that asset managers were not competing very much on price and that they were making high profits. So, as I say, a series of steps. Previous ones have included giving managers license to switch investors from one share class to another if it's in their best interests, and providing more information about benchmarks, why they use them, and if they don't use them, to explain to investors how they are able to compare the performance of their fund.

Black: And so, what is the new thing that's happening today?

Pettit: So, two things. Firstly, the Board of every fund company is going to have to have at least a quarter of their board members and a minimum of two be independent directors. So, to bring some external perspective and a different perspective on looking at their range of funds. And then, secondly, the Board are going to be responsible for ensuring that a detailed assessment of value that each of their funds have provided to their investors each year and then to present a summary of that to investors.

Black: And how do you show value in an investment fund?

Pettit: So, I think there's a couple of things. One is to look at what the fund is set out to do, and how successful it's been at that looking at things in terms of performance, the costs, quality of service. And also, I think one of the most interesting aspects is to explain the differences between the different share classes. So, as an investor, are you in the optimum share class for your situation.

Black: But is any fund going to put out a report saying, sorry, we haven't provided good value?

Pettit: That will be the interesting thing. So, the FCA has been very nonprescriptive about how these things are reported. But I think the industry are very conscious that they will be looked at very closely. And in some cases, it's natural. Not every fund will always be exceptional. Their investment style might not have been the right style for that particular period. So, yeah. So, I think the FCA and investors will be looking closely at what they're being told and how clear that is.

Black: And could this put more downward pressure on fees?

Pettit: Definitely. I think we've already seen some positive change. So, things like the Virgin Index Tracker, which has historically been a very high charging fund, reduced its fees earlier in the year. M&G have introduced a new charging structure that in part sees fees decline as the assets grow. So, both positive steps.

Black: And when will we see the first of these reports?

Pettit: So, they have to be put out within four months of each fund's accounting year end. So, around the end of January is when we expect to see the first ones.

Black: I wouldn't want to be the first one reporting.

Pettit: No, I think there's good and bad. So, with the nonprescriptive approach, it, kind of, opens up the field to be a bit competitive and to set best practice. So, I think we'll be looking very closely and eagerly awaiting those first reports.

Black: And other any other changes to come? Or is this the end of that?

Pettit: These are the last of that sequence of changes. Yeah.

Black: So, overall, what does this mean for investors?

Pettit: I think one of the best things about it is that it forces asset managers to look at their fund range from the eyes of their investors, and then to report back how they've done it in that context.

Black: Well, super. Thank you so much for your time.

Pettit: Pleasure. Thank you.

Black: And thanks for joining us.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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