Active managers accuse FCA of using flawed data
UK regulator’s damning report on competition in industry lead to ‘heated’ discussions
Active asset managers have accused the Financial Conduct Authority of using flawed and misleading data in the UK financial regulator’s far-reaching investigation into whether competition in the fund industry is working effectively.
The discord between active asset managers and the FCA came to a head last week when the regulator held a series of meetings with senior industry figures to discuss proposed reforms of the investment industry.
A senior investment professional who was present at one of the meetings, who requested anonymity, said the discussions became “very heated” with some “not very pleasant exchanges” between industry executives and FCA staff.
He said: “People are very cross. Does the FCA not understand that vilifying one of the UK’s gold-standard industries is not helpful, particularly in the context of the uncertainty surrounding Brexit and the likelihood that UK managers will not be able to continue to passport their funds into the single European market?”
The FCA meetings were set up after the regulator published a damning report last November that suggested charging structures across the industry should be overhauled to improve investors’ returns.
Active managers bore the brunt of the FCA’s criticism for failing to outperform their indices after fees, a finding that is consistent with a large body of academic evidence, and for failing to provide value for money for retail investors.
Active fund managers are increasingly questioning the quality and the breadth of the data used by the FCA.
Toby Illingworth, executive director at the New City Initiative, an organisation that represents the interests of 54 investment managers with combined assets of £400bn, said the FCA had failed to distinguish between various types of active funds.
“The FCA’s performance analysis bundled all active managers together, even though there are huge differences in the risks and returns generated across multiple strategies,” he said.
He added that there was “lots of evidence” to suggest that smaller managers were more nimble and delivered outperformance, even though they shouldered a heavier burden of regulatory costs.
He highlighted a controversial figure put forward by the FCA that indicated a £20,000 investment in a passively managed fund tracking the FTSE All-Share index over 20 years could yield a return 44 per cent larger than that of an actively managed equivalent.
Mr Ilingworth said this estimate was based on a period of strong equity market performance, whereas the real value of active management was demonstrated when stocks were more volatile or not performing well.
“Many of the consumers of active management are sophisticated investors. They would not pay the additional fees or invest in active managers if they did not feel there was a benefit,” he added.
The chief executive of a large fund house, who did not want to be named, said the FCA appeared to be suggesting that active managers had to take more risks if they wanted to justify their higher fees.
“But the holy grail of investing is to add value without taking disproportionate risks. Managers that delivered good returns with low levels of risk should be celebrated, not castigated,” he said.
The FCA declined to comment for this article.