How Fund Value Reports are Helping Investors

The first batch UK fund “assessment of value” statements may be uninspiring, but they are unlocking new value for investors, says Morningstar's head of policy Andy Pettit

Andy Pettit 7 April, 2020 | 10:27AM
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Many individuals will be familiar with the annual self-appraisal process at work. Many people see them an opportunity for some constructive self-promotion by succinctly reminding their boss what they have achieved, where they fell short and why, and what to focus on going forward. It makes for an interesting and actionable review discussion.

Others, though, might see the exercise as much more of a chore, completing the appraisal as a checklist, with minimalist answers devoid of context or colour.

The Financial Conduct Authority recently instituted a similar self-appraisal process for the UK fund management firms it regulates, asking them to each year tell their investors how they measured up against the objectives they set themselves and whether the service they provided represented good value for the fees they charged.

Setting the Standard

Eight groups have so far published assessments, covering more than 100 funds. While there have been some thorough reports, on the whole, those published so far give the impression that the self-appraisers have been in the camp that found them more of a chore than a chance for some positive self-reflection.

Perhaps that’s to be expected initially; with no template to follow and no peers to best, the examples we’ve looked through so far have slavishly stuck to addressing the seven factors that the FCA requires as a minimum. That doesn’t seem to jibe with the spirit of the FCA’s ambitions, though. It says: “‘The list of elements sets a minimum basis for the assessment, but it does not constrain the exercise of judgement by fund managers on other elements of their service that are relevant, or inhibit innovation in their offering to investors.”

Setting the standard so far are Rathbone and Vanguard. Both have provided standalone assessment reports that are reasonably engagingly laid out and Rathbone is alone in providing commentary on factors over and above the FCA’s seven criteria, talking also about corporate culture and business improvements, which including eliminating initial costs across its fund range and rewriting documentation to make investment objectives much clearer. Vanguard employs a traffic light table that succinctly shows how each fund measured up against each of the FCA criteria, and is the forerunner to a discussion of each individual criteria.

Aberdeen’s approach, meanwhile, is to provide a pass/fail scorecard marking funds against service, performance and cost targets and to provide additional commentary on the three funds that got a fail mark on the performance column. Other firms such as Aviva and Merian, have elected to incorporate their assessments of value within their annual reports, as have Unicorn, which takes the prize for the shortest, least detailed commentary to date.

Thus far, without exception, the boards of all these funds concluded that the charges of all the share classes of all of their funds were justified in the context of the overall value they were delivering to investors.

Some of these boards have, however, named a few funds whose performance they will continue to monitor closely, including the three Aberdeen funds referenced above, four funds each from Vanguard and Merian and one from Rathbone, which is also closing down another fund.

Are the Reports Helping Investors?

The good news for investors is that fund firms actions are speaking louder than the words in their assessments. While the documentation may be largely uninspiring, some investors have already received tangible benefits.

Some firms, including Aviva, have instituted fee reductions on select funds. Others, including Rathbones and Merian, have availed themselves of another new FCA rule that allows them to automatically move investors from one share class to another if it is in the investor’s best interest. Invesco, which is yet to publish its assessments of value, conducted a similar move earlier this year.

These changes benefit many investors who were long-term holders of a fund and have been invested in more expensive share classes for many years; they will now see the annual fees they pay for the fund drop by as much as half.

Previously, these investors had languished in these share classes due to a quirk of the 2013 Retail Distribution Review, which banned the payment of commissions from funds to advisers and distributors - but only on new business.

In response, firms launched many new so-called clean shares, that stripped out the embedded commissions and thus had lower fees. However, until now and the impetus of value assessments, longer-term investors have been left holding their original, legacy share classes, with firms retaining the embedded costs element that they previously passed on as payment to distributors.

There are many more firms due to publish their own assessments of value in the coming months and we will doubtless see an array of styles and content, from which best practice should gradually emerge. The FCA will be monitoring that fund boards are fully assessing the circumstances of each of their funds and reporting appropriately. In the meantime, fee reductions, performance monitoring and the phasing out of expensive legacy share classes are tangible benefits from this new piece of regulation.


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.

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Andy Pettit  Director, Policy Research (EMEA), Morningstar

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