The FSA's comparative tables have taken quite a pummelling over the past
few weeks. Having previously decided to exclude past performance data as
well as any measure of risk, the unit trust tables are now set to include
little more than details of charges – a fact that the industry believes
will render them useless and even misleading.
The worry has been that tables which only compare funds in terms of costs
will mislead investors into believing that cheap means good. Research
conducted by investment service Shouts for Money Marketing has, however,
clearly revealed that this is not the case.
Using data from Lipper, Shouts first looked at the 152 actively managed
funds in the UK All Companies sector which have a track record of more than
five years and analysed their performance in comparison to their charges.
The results offer compelling evidence of the need for the inclusion of past
performance statistics in the FSA tables.
Of the 63 funds with an annual management charge of 1.5 per cent, the
average return on a lump sum investment of £1,000 was £1,911.
For the 41 funds with an AMC of 1.25 per cent, the average return fell to
£1,898 and for the 41 with a 1 per cent AMC, the return was lower
still at £1,847.
Although perhaps less statistically significant because of the small
sample size, the two funds with an AMC of 0.5 per cent returned only
In the North American sector, the results showed an even clearer
difference in average returns between the top and bottom-charging funds.
The 44 funds with an AMC of 1.5 per cent returned £2,396, while the
five with an AMC of 1 per cent averaged just £2,065.
Shouts managing director Roger Bevan says: “The average return produced by
funds with a higher level of annual management charges is better than the
average return for funds with lower charges. It could be highly misleading
for the FSA's tables and supporting information to sway investors towards
choosing funds on the grounds of lowest annual charges.”
The research is the second blow to the FSA's tables in just a few weeks,
following Skan-dia's attack on the regulator's stance on past performance
The FSA is still standing by its decision not to include past performance
data in the tables, on the basis that it believes it provides no guide to
However, Skandia has put together a strong presentation, proving that
although past performance data can be misleading, it is wrong to discount
The FSA now has a dilemma . The tables, which are set for launch in a
matter of weeks, are welcome by almost no one in the industry in their
current planned format.
While factors such as past performance figures have been eliminated due to
concern that they may be misleading, the industry has now turned the
argument on its head, accusing the FSA of being misleading by eliminating
The FSA says it has been consulting the industry thoroughly on how to
compile the tables and will make it clear they are not a substitute for
advice. However, IFAs are concerned that the power of any tables endorsed
by the regulator will carry serious weight with private investors.
Plan Invest joint managing director Michael Owen says: “The FSA says they
are only a guide but we all know investors will look closely at these
things. My worry is they are going to single out costs, when there needs to
be consideration of past performance, risk and a whole host of factors.
Cost is only one factor.
“The statistics show that you would be foolish to buy anything on cost
alone. People would not buy the cheapest suit they could find, so why
should they buy the cheapest financial product?”
The upside of focusing on cost is that the tables may at least put
pressure on companies to bring down charges across the board. But Owen
believes that although they may prompt more Cat funds, which have to keep
their AMC below 1 per cent, this will only confuse the marketplace. He
believes it is unlikely the tables will prompt universal charge cuts but
admits the environment will certainly make it difficult for firms to raise
IFAs are understandably riled by the FSA's latest initiative. In a year
which has seen the first step towards depolarising the advice market, IFAs
have felt victimised by the Government and regulator and the tables have
come as yet another kick. It is yet to be seen exactly how they will be put
together and what they will include but it is clear they will not be the
creation the industry had at first hoped for.
Michael Philips partner Michael Both believes it is yet another move which
shows the regulator's loathing for IFAs. He says: “We are all thieving
swine to them. If they carry on like this they will put most of us out of