Share page with AddThis

Magazine Issues » June 2020

Regulation: The correct value judgements

BoxersThe first round of ‘Assessment of Value’ reports in the UK fund management industry reveals wide variation in quality, finds Bob Currie.

UK fund managers are now subject to the Financial Conduct Authority’s ‘Assessment of Value’ (AoV) regime, which forces firms to show what value their funds deliver to customers and take corrective action if value is lacking – potentially including fee reductions. 

The FCA says firms must explain their AoV process and any action taken. Meanwhile, experts say the recent first round of annual AoV reporting – covering, among others, SVM Asset Management and the distributor Hargreaves Lansdown (which also manages multi-manager products) – shows variations in quality.

Shiv Taneja, chief executive and founder of the Fund Boards Council, a professional members’ organisation promoting fund governance, says the FCA was right to be non-prescriptive about the AoV regime so that firms have the freedom to design their own methodologies, but adds that “on the basis of the AoV reports that have been submitted so far, the quality and depth of analysis is extremely variable”.

Some are two pages in length, some are more than 150 pages. Some are presented as standalone reports, others are included within wider annual reports and financial statements. Some are clearly presented on websites, others are difficult to find. “It is clear that some respondent AFMs [authorised fund managers] have invested considerable resource and intellectual capital in preparing their AoV reports, whereas others have done the barest minimum,” Taneja says. 

JB Beckett, an independent non-executive director (iNED) involved with the AoV disclosure for Edinburgh-based fund manager SVM Asset Management, says: “While there is much to commend this non-prescriptive design, personally I would have welcomed additional guidance from the FCA.

“Beyond its seven core considerations, the FCA left the door open to AFMs to add additional considerations. But it was difficult in this first phase of reporting to assess how many additional criteria would be appropriate. If we added multiple additional considerations, all of which were rated ‘green’ in our assessment, might this be viewed as an attempt to dilute attention from the FCA’s seven core criteria – particularly if SVM funds rated ‘amber’ or ‘red’, according to our evaluation, for some of these core criteria?”

Danny Cox, head of communications at Hargreaves Lansdown, says: “Whilst the AoV has seven specific areas to address, these aren’t prescriptive, so it gives us a chance to highlight our opinion regarding where we add value as a fund management house. With the lack of a template, definitions of what constitutes good value are subjective and we have seen a lot of variance across the industry in terms of length of reports, types of analysis which have been conducted, and agreed actions. Trying to make this relevant and presentable to a more lay investor presents another challenge.” 

Sunil Chadda, a project director at Punter Southall Analytics, which offers a service to help asset managers and investors with AoV disclosures, says the general view is that many of the AoV disclosures published to date are of poor quality and, should this continue, the FCA will not see many of the desired improvements that it sought through the AoV regime. 

“The FCA will be revisiting the AoV space in Q3 or Q4 2020 with a view to reviewing the first year’s AoV Disclosures and taking any enforcement action, if appropriate,” says Chadda, who is also an ambassador for the Transparency Task Force campaigning community. 

“The threat of further action to enhance the independence of fund boards hangs in the air.” 

Remedial action
Some AoV disclosures provide a limited indication of where a fund manager will deliver value enhancements or take meaningful action when shortcomings are identified, says Chadda, who has taken an extensive look at Hargreaves Lansdown’s AoV reporting for its multi-manager funds.

In its AoV reporting, Hargreaves says: “The Board are happy each of our funds offer economies of scale benefits to investors and represent value based upon the additional level of service investors receive when investing through a Fund-of-Funds structure” (Hargreaves Lansdown, Multi-Manager Value Assessment, 2020, page 5).

Funds Europe asked Hargreaves Lansdown to confirm whether it will be taking action, subsequent to its AoV disclosure, to enhance the value that it delivers to investors in multi-manager funds. Cox, its spokesperson, is explicit that amendments will be forthcoming. 

“We are reviewing the feedback we have had from clients and the wider industry in preparation for the next review which will start later this year. A host of governance changes are also being implemented across Hargreaves Lansdown, including within the fund management arm of the business, and any changes we do end up making will be for the benefit of the end investors in ensuring good outcomes and good value,” he says.

However, there is little detail of these governance changes, or other value-driven reforms, specified in the Hargreaves Lansdown Value Assessment document.

Punter Southall Analytics’ Chadda questions the degree to which Hargreaves Lansdown’s application of the FCA’s AoV principles is consistent with “measuring value” from an investor’s perspective. A noteworthy feature of Hargreaves Lansdown’s AoV assessment for multi-manager funds is that it refers on multiple occasions to a fund’s performance relative to its “benchmark” – and yet none of the ten multi-manager funds have an official benchmark declared in the objectives and investment policy of the fund. 

“Hargreaves Lansdown have used a number of ‘performance comparators’ to compare the performance of each of its multi-manager funds,” says Chadda. “A primary reason for the choice of specific fund performance comparators is that the ten multi-manager funds have no official benchmark according to the respective funds’ Key Investor Information Documents (KIIDs). Instead, in the absence of an official benchmark, Hargreaves Lansdown are using the fund’s Investment Association sector as an ‘aspirational’ benchmark for some of the funds and declare ‘value’ on other funds by comparing performance against the fund’s investment objectives.”

One example of the HL MM funds’ investment objectives is to “provide long-term growth”, says Chadda. “However, it is misleading to use this as a performance validator. It is also a very low bar to get over.”

More significantly, Chadda says that the issue of using aspirational benchmarks for all ten funds is “huge”. 

Speaking about the industry in general, he says: “Aspirational benchmarks were banned [under FCA 19/4 ‘Asset Management Market Study - feedback to CP18/9 and final rules and guidance’] in May 2019 for new funds and in August 2019 for existing funds.”

Funds Europe asked Hargreaves Lansdown to clarify how the term ‘benchmark’ is being used in its AoV disclosure. It responded: “In these instances we are referring to the fact that we are comparing the performance to the respective IA sectors in these reports. In hindsight this should read as ‘relative to its IA sector’ and we will ensure further clarity in future reports.” 

Beyond this, the HL AoV document uses performance comparison classifications which in some cases do not seem an obvious choice for the fund concerned. For example, the HL Multi-Manager Asia & Emerging Markets fund is assigned to the IA Specialist Sector, and not the IA Global Emerging Markets sector. Also, the HL Multi-Manager High Income Fund is assigned to the IA Flexible Investment Sector; and the Multi-Manager Special Situations fund sits in the IA Global Sector. 

Explaining why it has used this choice of performance comparators, Hargreaves Lansdown said: “None of the Multi-Manager funds have a target or constraining benchmark set out in the fund prospectuses, so for the purpose of meaningful comparison we have assessed performance against the respective IA sector within which each fund sits. For some funds this makes more sense than others. Funds like the Multi-Manager High Income and Multi-Manager Asia & Emerging Markets funds may look considerably different to other funds within their IA sectors, due to the diverse or flexible nature of the sector.”