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FCA: ‘We are not pro-passive’

Regulator says it is “not the case” that it is focusing on one investment strategy over another

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The FCA has rejected claims its findings into competition in the asset management sector are skewed in favour of passive investing.

In its asset management market study final report, published today, the FCA set out proposals to reform fund management after the regulator found evidence of “weak price competition in a number of areas of the asset management industry”.

Following its interim findings in November, the FCA received 153 written responses and spoke with almost 200 stakeholders from 135 organisations.

The regulator says it has also carried out further work in response to industry feedback.

But the FCA pushed back on suggestions made in the wake of the interim report that the regulator was attacking active management.

The FCA says: “One point raised in the feedback, which we want to address, was a perception that our interim findings suggested passive funds were preferable to active funds.

“This is not the case. Rather than focusing on one strategy over another, we think it is important investors understand both the total cost of investing and the objectives of the fund or mandate they are investing in, so that they can choose the product that best meets their needs.”

The regulator says its further analysis found that both active and passive funds failed to outperform their benchmarks after fees, for both retail and institutional investors.

It adds: “Our additional analysis suggests there 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. This suggests when choosing between active funds investors paying higher prices for funds, on average, achieve worse performance.”

FCA sets out reform package for asset management sectorVanguard says its research supports the FCA’s findings.

Vanguard Europe managing director Sean Hagerty says: “Our own proprietary research demonstrates the impact of cost on performance. Our findings show too many funds fail to meet their performance benchmarks, largely because of the charges they levy.”

He adds: “As an industry, we have an opportunity to reassure people investing can be a force for good, and for many people, a sensible way of providing for the future.

“This includes ensuring investors have access to all the information they need, including costs, in a format they can understand. The increased transparency proposed by the FCA will enable an informed investor to choose high quality, low-cost products which will lead to better financial outcomes for UK investors.”



How are firms choosing their passive buy lists?

Major firms have shed light on how they pick passive funds in their buy lists as the industry fights over how many and which to hold. In a recent study, the FCA expressed concerns that providers’ lists of favourite funds did not include enough passives. Platforms and wealth managers such as Tilney Group and AJ Bell […]


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. This is an accurate assessment but it isn’t new news. Experienced planners have known this for years. A good article from a few years ago headed ‘do winners repeat?’ Showed two consecutive four year periods in the early part of the millennia. Hardly any of the top funds in the first period repeated in the second and there were some big names in both.

  2. With regard to ‘past performance is not a guide to the future’ there are 2 elements to this… Absolute and relative performance and I feel that they are looked at in the round.

    A fund (heavily influenced by it’s primary asset class) will not deliver absolute performance year on year which looks like the past due to changes to economic and investment climates etc and therefore historic performance of an asset class won’t necessarily give a good indication of next year – and even if it did, there’s no way of really knowing it will. Long term, it’s a different arguement (CAPM etc) but short/medium term next years performance is likely to bear little correlation to this.

    Now for the contentious bit – relative performance, on the other hand, reflects stock selection and therefore given a fixed asset allocation, many investors would be of the opinion that a ‘good’ fund manager will deliver ‘good’ relative performance over time. Of course, there is no certainty, and there are many who will vociferously disagree, but Warren Buffet didn’t make his wealth tracking indices.

    This is a completely different ‘type’ of past performance and shouldn’t be confused with the former.

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