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Commentary - FCA Asset Management market study

20th Dec 2016

This is currently out for consultation.  Here's our take on the highlights.

Link to FCA paper is here 

The direction looks to be for greater transparency and competition.


1.      The FCA shows quite clearly that over the long term investors willing to put their money at risk are likely to generate greater returns than they will through cash savings. £20,000 invested from 1996 to 2015 would have grown to just over £40,000 using 3 month Libor rates but virtually £70,000 in the FTSE or Share Index.



2.     Next...charges on typical passive funds are much lower than for actively managed funds, so that assuming the same return an investor in a passive fund would have 24.8% more money after 20 years which grows to 44.4% once all transaction costs have been taken into account.



3.      The paper introduces a new acronym Ongoing Charges Figure (OCF). Then shows further numbers which add the OCF to explicit and implicit transaction costs. One of the themes is transparency of overall charging.



4.     There are a lot of asset management firms authorised in the UK - 1,840



5.      Passive funds now represent around 23% of the assets under management in the UK.



6.     The typical annual average disclosed fee for actively managed equity funds is 0.9% per annum, the average passive fee is 0.15%. Further, transaction charges are normally higher for active than passive.



7.      One of the findings is that there is weak price competition in a number of areas which has a material impact on investment returns through the charges paid for asset management services. This emphasis on charges is relevant to discussions on drawdown comparison services.



8.     The FCA shows there is significant price clustering for active equity funds, i.e. firms are reluctant to undercut each other. There is more price competition in the passive sector.



9.     They also show that the asset management sector is substantially profitable earning an average profit margin of 36%, even higher if profit sharing elements of staff remuneration are included. 



10.  The FCA research shows that actively managed investments do not out-perform their benchmark after costs, those that are available to retail investors under-perform against benchmark after costs and products available in the institutional market do not receive returns significantly above the benchmark.



11.  There seems to be no significant correlation between charges made and performance.



12.  The FCA reiterates from research that past performance is not a good indicator of future risk adjusted net returns.



13.  The research showed that in this market, as in others, there is a high degree of inertia and not enough switching with investors remaining in persistently poor performing funds.



14.  They show concern about the activities of investment consultants, used by pension funds and others to help chose fund managers. They don’t think their activities help institutional investors identify better performing managers or funds and are suggesting a market investigation by the CMA in this area.



Overall there are interim proposals on some possible remedies, on which the consultation ends on 20th February 2017. Their intended overall policy package is aimed at a greater increase of transparency on costs.



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