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FCA fund report falls short

By Justin Modray, published 28 June 2017.

It’s been our long-held view that most fund managers (ignoring trackers) are less than fair when it comes to charges. Annual charges for most actively managed funds are rather similar (at what is generally considered a very profitable level) and managers invariably fail to share economies of scale with customers as their funds grow in size.

Fund managers don’t seemingly want to upset the status quo, so the catalyst for change needs to come from investors and/or the regulator. Since investor power is rather lacking, probably because most are either naïve about fund charges or simply don’t care – we had high hopes when the Financial Conduct Authority (FCA) published a paper last year clearly highlighting how fund managers were failing investors, primarily over charges.

Those high hopes have today turned to disappointment, as the FCA’s final report on how it proposes to fix these issues is a damp squib and unlikely to make a tangible difference to most investors.

The key proposal appears to be a desire to move towards an ‘all in one’ annual charge. The main difference between this proposed charge and the current Ongoing Annual Charge Figure (OCF) is the addition of transaction costs (mostly dealing fees when a fund manager buys and sells shares), which tend to be between 0.1%-0.4% a year.

We don’t think this make much difference, if anything it will probably just create further confusion around charges.

The key areas where we feel fund managers are acting unfairly are price clustering, failing to pass on economies of scale and profiting from inflated admin expense claims.

Looking at each in turn:

Price clustering
Perhaps it’s little co-incidence that most actively managed funds charge a 0.75% annual management fee. There is no rational reason for this other than it’s what managers have gotten away with for years. While I doubt this is formal price collusion, there is no incentive for any of the larger managers to break rank and risk disturbing their high profit margins. This means very little likelihood of price competition and nothing the FCA has said today will likely change that.

Economies of scale
A manager running a £10 billion fund will typically generate 100 times more in management fees than one running a £100 million fund, yet the additional costs of running the larger fund are significantly less. We’d like to see fund managers running large funds share some of the economies of scale with customers by reducing their annual management charge, but this doesn’t currently happen.

Inflated expense claims
As well as annual management charges, managers also usually claim administrative expenses from their funds. However, our research suggests some likely claim well in excess of the actual expenses incurred. The most notable example is M&G, which has been claiming over £100 million a year from its funds via this questionable practice. Other notable examples include Jupiter, Fidelity, Schroders, Scottish Widows and JPM. It’s an unfair and unacceptable practice which the FCA should be stamping out, but despite recognising the problem today’s report offers no solution.

Fund management has always been a somewhat one-sided affair, in that investors take the lion’s share of risk while fund managers usually enjoy high profit margins. Today’s FCA report was a real opportunity to re-address that balance, but sadly I just can’t see that happening as the FCA is relying too heavily on price competition – which to date has been largely absent.