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FSA gets lowdown as low-charging funds produce low returns

The FSA&#39s 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

£1,717.

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&#39s 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&#39s tables in just a few weeks,

following Skan-dia&#39s attack on the regulator&#39s stance on past performance

last month.

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

the future.

However, Skandia has put together a strong presentation, proving that

although past performance data can be misleading, it is wrong to discount

it entirely.

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

too much.

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

fees.

IFAs are understandably riled by the FSA&#39s 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&#39s 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

business.”

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