With asset managers still reeling from the regulator’s hard-hitting competition review, Emma Cusworth considers what value and transparency should look like.
“There has been complacency in the industry. This has reduced, but it still exists, which is unacceptable. There is no doubt that active managers and advisers will have to give evidence that they are adding value.”
Roger Mattingly, Pan Trustees
Something is clearly afoot in the asset management industry. Despite the huge number of firms offering fund management services, and the enormous pressure the low-return environment is putting on investors, fees in the active management sector have barely changed. While they have fallen in passive management, it is clear from the average firm’s profitability that competition in the asset management industry is far from efficient. And investors are paying the price.
The Financial Conduct Authority’s (FCA) Asset Management Market Study Interim Report, published in November 2016, raises some alarming issues, most notably for active managers. Despite a long-running debate, which has generally concluded that, on average, active managers don’t provide value for money, prices have remained inexplicably high. Furthermore, their ability to keep fees high means that, despite persistent underperformance, managers are also able to retain all the benefits of economies of scale for themselves as their asset base grows.
Yet, this market is far from being a monopoly. The FCA’s data shows the number of firms currently authorised in the UK stands at 1,840 and has grown 2% since 2014. For asset managers to be able to consistently deliver poor value, the competitive forces that should be at work in the industry, are clearly not working.
“The FCA has done a great job of shining a light on some inconvenient truths,” says Dan Brocklebank, director at Orbis Investments. Not least among these is that actively managed investments do not outperform their benchmarks after costs. Neither do passive funds, but that is generally expected. Of course, the average active manager cannot beat the market-cap weighted benchmark before fees because they are the benchmark. Thus, index returns are equal to the average active manager’s performance before fees.
However, as Sally Bridgeland, a pensions industry veteran and independent trustee, says: “The difference in performance between active and passive needs to be at least as great as the difference in the costs. With increased use of technology and advantages of scale, passive management starts from a low base.”
The report highlights this succinctly by comparing the net return on a £20,000 investment over 20 years, which assumes both active and passive funds earn the same return before charges. They found an investor in a typical low cost passive fund would earn £9,455 more than in the typical active fund, but that increased to £14,439 once transaction costs had been taken into account.
