Consumers can choose between as many investment funds as they can shades of paint. Lots of choice can be a good thing and we, the Financial Conduct Authority, welcome innovation. But consumers might be surprised if they took home a variety of colours, only to discover that each tin just contained white.
There are many diverse strategies out there. Some funds set out to track a benchmark (passive) while others make decisions about which assets to hold (active), typically trying to beat a benchmark. And there are many different colours in between. Compared to tins of paint though, it’s much harder for consumers to know whether their funds are doing what they said they would.
Take, for example, one type of fund we have been dealing with for a few years, so- called ‘closet trackers’.
‘Closet trackers’ are passive but look and charge like they are active. A similar but different colour is a ‘closet constrained’ fund. They make active decisions but only restricted ones around a benchmark. This may limit underperformance when markets fall but, importantly, may also constrain growth to levels similar to the benchmark. In both cases the way the fund is managed isn’t clear so consumers aren’t getting what they expected.
We expect fund managers to take their duty to their consumers seriously. They should manage their funds the way consumers expect them to and tell consumers what they are doing.
That is why clear promotional material for investment funds is a priority for us. Most recently we discussed it as part of our proposed remedies in the Asset Management Market Study final report, published in June 2017.
When we’re aware that firms haven’t been clear, we have a range of powers that allow us to intervene to protect consumers.
By the end of last year, we’d reviewed 84 potential closet tracker funds. In 64 funds we’ve required the manager to make it clearer to consumers how constrained they are. And we found the other 20 were adequately describing how they were being managed. Overall, £34m in compensation has been paid to consumers. Separately an enforcement investigation is ongoing against one firm.
The final report stated there’s £109bn in partly active funds charging fully active fees. And some observers inferred that this all related to closet trackers.
This isn’t quite correct.
This figure referred to the amount invested in partly active funds that were significantly more expensive than traditional passive funds. These funds may well be adequately disclosing how they are investing people’s money. But they are expensive compared to similar products, reinforcing the central finding in our study; that price competition in asset management is weak in a number of areas. Consumers should be aware how expensive their funds are and what risk and rewards they may receive. This will help them understand whether a fund is right for them and offers overall value.
We want consumers to have confidence that when they buy a fund, they know it will do what it says on the tin.
A version of this FCA comment first appeared in the Telegraph newspaper