UK active managers: taking a shelling
The FCA’s long-awaited report will fuel the passive investment trend
It is hard to find anything the UK’s Financial Conduct Authority likes about active asset managers in a long-awaited report that will fuel the passive investment trend. Price competition is weak, it says. Profit margins of about 36 per cent are too high. There is little relation between the charges of active funds and their performance. Active managers, protected by the human shield of the banking industry since the financial crisis, are finally getting it in the neck.
It will be an extended process, like the courtship of the creature that inspired the nickname of FCA boss Andrew “Sexy Tortoise” Bailey. Fund groups and their shareholders are relieved the report does not go further: the shares of Schroders and Jupiter were flat on the announcement. The regulator will, for example, consult further before requiring them to disclose a single, all-inclusive charge to investors.
But Mr Bailey will get there in the end, as will European regulators. Transparency is coming, dispelling easy money and shifty practices. “Box profits” are emblematic of these. Some asset managers swallow the bid-offer spread on dual-priced funds when they are able to match buy and sell orders internally, or “inside the box”. The FCA says it should stop.
Asymmetric performance fees are also in the sights of the FCA. Perhaps investment companies who get a bonus when funds beat benchmarks should pay a penalty when they undershoot? The suggestion will have made hedgies choke on their breakfasts at their discrete Mayfair clubs. The only crumb of schadenfreude for fund managers is in long-overdue criticism of powerful investment consultants.
It was inevitable the FCA would focus on charges, which are predictable, over performance, which is not. Its report is part of a regulatory trend whose consequence will be a further shift of client assets into low-cost index funds. These now control more than 20 per cent of about £7tn of assets managed by UK-based businesses.
Index funds are certainly cheap. But the idea that they immunise the investor from human error is fallacious. They merely replace the share screen of a lone optimist with one devised by an index committee. Passive investment makes “late stage momentum investors” of us all, as fund maverick Daniel Godfrey puts it. It is not a better system, merely one that worries regulators and disengaged investors less.