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FSA sets the table

The FSA has indicated that it is aiming to make its first comparative

tables available in the autumn and that these will be for Isa UK growth

unit trusts and Oeics.

The tables will be put on the FSA&#39s website so they will only be

accessible to members of the public who use the internet. They are not

guaranteed to include all product providers as there is no compulsion on

providers to offer information.

The FSA does not specify in detail what items of information will or will

not be shown. It does state, though, that past investment performance will

not be shown on the grounds that the FSA believes the past is not a good

guide to what will happen in the future.

However, as reported in Money Marketing recently, Skandia is planning to

challenge this stance and will be writing to the FSA with evidence to prove

that past performance does provide a guide.

It would appear the FSA has given up on including a meaningful measurement

of risk although it is to be hoped that the tables will at least

distinguish between trackers, fund of funds, general funds, specialist

funds and guaranteed/ protected funds.

Will they show items such as the age of the fund, the size of the fund and

the manager of the fund and, if so, how helpful will this be for an


The FSA&#39s website says it is not trying to lead an investor to a

particular fund but is aiming to help narrow the number of funds down to a

short list from which the investor can make a choice with the help of an

adviser if necessary.

As the FSA clearly believes charges are important, they are certain to be

shown. But will they show the initial charge, annual management charge and

total expense ratio and, if so, will they be able to explain adequately,

for the benefit of the public, what each of these is?

Or will the tables contrive

to show the effect of these charges at different times based on assumed

levels of investment return? The FSA ack- nowledges that the public find

reduction in yield unhelpful.

We assume that the FSA will publish at least some of this expense

information and also show if a fund is Catmarked.

The FSA says the information will enable retail consumers to shop around

for a better or more appropriate deal and will expose in a public document

the extent to which products of the same type offer better or worse value

for money to the consumer.

Unit trusts are being chosen for the first tables because, the FSA claims,

they are a relatively simple product. But how will value for money be

measured, given that the same unit trust may be bought with standard

charges or with a discounted initial charge? Or perhaps some of the annual

charge will be rebated or all the commission element of the charges

returned to the investor, who will pay a fee instead?

The FSA says investors pick funds largely on the basis of performance and

quotes an Autif survey which found only 14 per cent of respondents cited

“reasonable charges” as a reason for their fund choice.

The FSA concludes that the private sector does not provide retail

investors with the know-

ledge they need to make inf-ormed investment decisions because what the

market does provide is almost universally focused on past investment

performance. It maintains that advisers cannot be expected to know the

whole market for all products so the comparative tables will help them too.

To make an informed decision, the FSA says retail inv-estors must:

l Know they cannot improve their chances of picking a fund that will

perform well in the future by picking one that has performed well in the


l Know that a fund&#39s charges, on average, adversely affect

the return it provides to its investors.

l Know that charges vary considerably across funds on offer.

These are all dangerous assumptions. For instance, to imply that cheap

means good is more than misleading. A look at Cat-standard funds

demonstrates this.

Catmarked funds represent only 3 per cent of all available funds and half

of these are index trackers. Of the rest, performance over the last five

years has been largely bottom half in each fund&#39s Autif sector

and has also tended to be

highly volatile.

A number of the funds have performed worse than a corresponding tracker

fund. So, if the FSA&#39s comparative tables will result in more investors

buying Catmarked funds, they may also result in an increase in the number

of dissatisfied investors.

Shouts also identifies that the average return produced by funds with a

higher level

of annual management char-

ges is better than the aver-

age return for funds with

lower charges.

These results, using data from Lipper&#39s Hindsight, are based on five-year

periods ended at the middle and end of 2000 and the middle of 2001 for the

UK all companies and North America sectors, excluding index trackers,

institutional, charity and exempt funds. It could, therefore, be highly

misleading for the FSA&#39s tables to sway investors towards choosing funds on

the grounds of lowest annual charges.

A look at total expense ratios is also revealing. Data from Fitzrovia

shows on average the total expense ratio is 0.2 per cent higher than the

annual charge and that 20 per cent of funds have a TER higher than 1.75 per

cent a year. Clearly, if the FSA decides not to use TERs, investors will

not even be getting a proper reflection of charges.

Although, as the FSA says, a unit trust product is in itself a simple one,

the variations within it are complex in terms of risk, charges, age, size

of fund and management considerations. There is a risk that comparative

tables may mislead the public but we can only hope that the confusion which

may follow will lead investors towards independent advice.


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