Are Funds Good Value?

VIDEO: Morningstar's director of policy research, Andy Pettit looks at what the latest fund value assessment reports mean for investors, especially in relation to fees

Holly Black 1 July, 2020 | 2:44PM
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Holly Black: Welcome to Morningstar. I'm Holly Black with me is Andy Pettit, he's Director of Policy Research at Morningstar.


Andy Pettit: Hello, Holly.

Black: So, you're here to tell us at the halfway point in mid-year a bit of an update on these fund value assessment reports? Can you give us a quick reminder of what they actually are?

Pettit: Sure. So it's difficult to get excited about regulation. But I do think this one is certainly worthy of that. What I like about it is that it really compels the directors of fund companies to put themselves in the shoes of their investors and give an honest appraisal of how their funds have done during the course of the year.

Black: And out of this, what we're hoping for is that fund companies maybe reassess their fees or their ranges where they're maybe not providing value for money for investors. Is that right?

Pettit: Yeah, so specifically what they've got to do is assess themselves, I kind of think of it as like doing a performance appraisal at work. And typically, you get some people that take the opportunity to showcase what they've done well, and where they'd like to improve. And you get others that treat it much more as a tick box exercise. And I think that's kind of how things have played out it in this case, as well. But the onus is really on directors to consider their funds in the context of the fees they charge and come out with an opinion or whether that has offered good value or not.

Black: So we're six months into these reports now, what are some of the key findings that you've seen so far?

Pettit: Yeah, so we've seen about 25 or so companies published so far, we’re probably about a third of the way through in terms of number of funds so far, and it's been great. I think there's two angles. One is the reports themselves, which I'll come back to in a second. But in terms of the results that they’ve generated, I think we've seen a few funds closing as a result of it, or at least linked to the assessment process. We've certainly seen a number of funds, reduce their fees, and most impactful of all, has been the firms moving their unit holders from more expensive share classes into equivalent lower cost ones. And that's really almost completing the job that RDR started in terms of taking out advise fees from being embedded within funds. So a number of investors were unlucky enough to have stayed in those more expensive share classes until now. And these assessments have been the catalyst to move with them to cheaper classes.

Black: Have there been any companies that have particularly stood out for you in how well they have approached this?

Pettit: Yeah, I think a few standout, either in terms of the quality of their reports in terms of how well they explain the purpose of the report and the process that they've undertaken, and also in the actions that they've taken. So, people at Vanguard, Columbia Threadneedle, with a big range of funds, Rathbone's so, yeah.

Black: So at the halfway point in the year, what's the outlook for the rest of the year? Lots more of these to come and do you think they'll get better as they go?

Pettit: You know, I think there'll be an interesting thing. So the people that have gone early obviously haven't had a template to aspire to or to copy if you like, the FCA was deliberately very non-prescriptive, encouraging the industry to come up with best practice. So it'll be interesting to see whether the ones that are yet to come take on some of the good points of people that have gone before them. I'd expect a similar theme in terms of seeing some cost reductions, probably some more unit holders to be moved to the lower cost share classes.

Black: Are there any improvements in the reports themselves that you would like to see? Presumably they haven't all been fantastic.

Pettit: No, as I say, I think some have been much more a check the box exercise very specifically, answering in the briefest form the seven points that the FCA asked them to consider at a minimum. So the better ones to my mind give a bit more context and explanation of why this is being done, the kind of things that are being looked for and the process that the firm goes through. And finding a nice balance between keeping it reasonably succinct, easy to comprehend in terms of tabular layouts and calling out which areas are particularly being looked at. So for example, some funds will have been put under review or on a watch list if you like where usually in the case of their performance, it's not been where the manager would have liked it to be. And there’s often good reason for that, in terms of the segment that the fund is operating in being out of favor, things like that.

Black: Andy, thank you so much for your time. For Morningstar I'm Holly Black.

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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Holly Black  is Senior Editor,


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