The UK FCA (Financial Conduct Authority) has just released its' long awaited final report into the UK asset management industry. Overall, the report is fairly negative on the UK active fund industry, especially those funds that can be classed as 'closet indexers'. Arguably, these concepts have been understood in the industry for sometime which has resulted in attention on equities funds with high active share, for example.
For Australian investors, some of the Report's conclusions ring true. Anecdotally, the local retail market appears more competitive with change being evident in areas such as managed accounts and new platforms. While, in the institutional market, managers report continued downward fee pressure and threats such as insourcing and fundamental beta in a structured industry environment.
With regard to selecting fund managers that are likely to outperform and avoiding the underperformers, the FCA Report notes that relying on quantitative data alone is insufficient. This implies that qualitative expertise that is forward looking is essential in constructing diversified multi-manager portfolios.
Selected conclusions from the FCA report (Executive Summary):
"The UK’s asset management industry is the second largest in the world, managing
around £6.9 trillion of assets. Over £1 trillion is managed for UK retail (individual)
investors and £3 trillion on behalf of UK pension funds and other institutional investors.
The industry also manages around £2.7 trillion for overseas clients".
"We find weak price competition in a number of areas of the asset management industry. Firms do not typically compete on price, particularly for retail active asset management services".
"[T]here is no clear relationship between charges and the gross performance of retail active funds in the UK. There is some evidence of a negative relationship between net returns and charges".
"We find that it is difficult for investors to identify outperforming funds. This is in part because it is often difficult for investors to interpret and compare past performance information. Even if investors are able to identify funds that have performed well in the past, this past performance is not likely to be a good indicator of future performance. There is little evidence of persistence in outperformance in academic literature, and where performance persistence has been identified, it is persistently poor performance".
"We found some evidence of persistent poor performance of funds. However, we also noted that worse performing funds were more likely to be closed or merged into better performing funds".
"We find that many active funds offer similar exposure to passive funds, but some charge significantly more for this. We estimate that there is around £109bn in ‘active’ funds that closely mirror the market which are significantly more expensive than passive funds".
"We have identified concerns in the investment consulting market. These include the relatively high and stable market shares for the three largest providers, a weak demand side, relatively low switching levels and conflicts of interest".
Please consult the FCA website for more information: www.fca.org.uk