A paper published by the CMA as part of its investigation into the investment consultancy sector found that the gross product return of products that were ‘buy-rated’ by investment consultants is 0.23 per cent higher than benchmark return on average per quarter, a figure it described as statistically significant. But once fees were taken into account, only a 3.3 bps outperformance was achieved each quarter, which the CMA says is not statistically significant.
The watchdog raised concerns over claims made by investment consultants over their ability to pick funds that would beat their benchmarks. The CMA found evidence that consultants showed results gross of fees, whereas net of fees is a better approximation of the return on investment an IC client could expect to receive. Consultants also compounded results over several years of performance, and show results for a subset of asset classes or recommended products.
The CMA found that the average active above-benchmark return of unrated products was 9.6 bps, delivering an above benchmark return of 5.7bps per quarter.
The CMA’s quantitative analysis does not cover all products recommended by investment consultants: it only looks at the performance of actively-managed asset management products that exist in a database maintained by eVestment. The research covered recommendations made by investment consultants using eVestment, for the period 2006 to 2015. Mercer’s recommendations were not included as they do not use this platform.
The research found that, on a net of asset management fees basis, ‘buy-rated’ hedge-fund products outperformed their respective benchmarks on average, and ‘buy- rated’ hedge-fund products outperformed ‘unrated’ hedge-fund products on average. But it found these results did not hold for other asset classes.
The paper says: “On a gross or net of asset management fees basis, the active return of ‘buy-rated’ products is greater than that of ‘unrated’ products on average, but not to a statistically significant extent.
“For the purposes of this empirical exercise, we placed more weight on the figures net of asset management fees, as these are a better approximation of the return on investment an investment consultant client could expect to receive if it invested in a ‘buy-rated’ product.
“Further, this analysis also accounted for the fact that investment consults appear to be able to negotiate asset manager fee discounts on behalf of their clients. We note that the fees actually paid will vary substantially between clients, and that some but not all of the discount is attributable to investment consultant negotiation.
“Redington, IC Select and Mercer referred us to papers in the academic literature suggesting asset allocation determines around 90 per cent of performance.
“However, other papers (Ibbotson (2010) and Hensel, Ezra and Ilkiw (1991)) suggest that a significant amount of variation in performance is determined by factors other than ‘asset allocation’, such as ‘manager selection’, for example.
“Whilst we recognise that manager recommendations are only one part of the service that investment consultants provide, manager recommendations is an area which potentially adds value and can reasonably be measured, and where claims are commonly made.”
As a result of its findings the CMA has launched a consultation asking:
- Are trustees easily able to compare claims regarding the impact of asset manager product recommendations made by different firms during a tender, for instance?
- Would trustees benefit most from information on returns achieved by recommended asset manager products on a gross or net basis?
- How could the presentation of the impact of asset manager product recommendations be made more comparable, comprehensive, relevant and useful?
- What are the challenges of developing a common methodology? Should this be mandatory and, if so, should there be scope for divergence in specific circumstances?
- Should any claim in relation to the impact of a firm’s recommendations be subject to external benchmarking or scrutiny and should this be assessed against a common methodology for presenting impact?
- How should any change in presentation be implemented and enforced?