Why aren’t fund managers getting ‘Assessments of Value’ right?
The short answer is, according to a recent CFA Society UK analysis, that assessments of value often don’t give the right information, or are difficult to understand, or are lengthy and poorly structured. On top of that, not to put too fine a point on it, many are just plain boring.
What value does an Assessment of Value (’AoV’) assess?
This is an element of fund disclosure instigated by an FCA policy statement in 2018 which tasked boards of authorised fund managers(‘AFMs’) with producing an assessment of the value provided by each of their funds. The AoV is required to be based on review of seven mandatory factors:
quality of service: range and quality of services provided to unitholders
performance: investment performance after deduction of payments from the fund
AFM costs: in relation to each charge, the cost of providing the service to which the cost relates
comparable market rates: the market rates for comparable services provided by the AFM or to the external AFM if tasks are delegated
economies of scale: whether the AFM can achieve savings and benefits from economies of scale given trends in fund size
comparable services: the AFM’s and its associates’ charges for comparable services to other clients for comparable portfolios of comparable scale
classes of units: appropriateness of unitholders having units paying higher charges than other units with similar rights
The AoV is required to be included in a fund annual report or in a separate publication covering all relevant funds and published annually from 1 October 2019. So AoVs have been with us now for nearly eighteen months.
So what’s wrong with AoVs?
According to the study published in February by the CFA Society (which had previously published a suggested framework in 2018), quite a lot is wrong with quite a lot of them:
“The standard of AoV reports varies substantially and a significant proportion of reports aren’t up to scratch. Close to a quarter of AoV reports (24%) did not clearly outline their investment objectives, which was one of the few specific requirements outlined by the FCA. Likewise, more than two-fifths of reports (42%) failed to state the ongoing charges figure (OCF) at individual fund level – one of the most basic features that ought to be available to retail investors.”
The median percentile score given by the CFA for the report universe was 50%; scores ranged from 4% to 90%. That’s not too good.
Our own anecdotal survey based on funds we personally invest in indicates that one of two attitudes were taken to preparing AoVs: either undertake a genuine exercise in the interests of investors and learn from it or ‘tick the compliance box’. Two thirds of the assessments we read appeared designed to bore the investor or confuse them to such an extent that they lost the will to find out more.
Do AFMs have something to hide, that they do this? The fact that the CFA Society could not even find these reports in 25% of cases is worrying in this respect.
One third of the assessments we looked at were genuinely informative and well presented. In these an average of one and a half pages per fund gave an excellent overview of factors used, identified independent sources of validation and deployed graphics to show outcomes very effectively.
The other two thirds took an average of five and a half pages per fund, quoted independent sources of validation to a much lesser degree, used text and figures more than graphics and were not – to our eyes at least – either convincing or user-friendly.
As professionals in the market we found that self-satisfied statements that “we have confidence in the quality of services provided both internally and externally…” simply did not cut it (research with existing clients is surely possible? But if it was done, it was not cited). To be fair, at the other end of the spectrum, others were brutally self-critical: ”Based on our assessment, we have concluded that the Fund does not provide overall value and therefore has been given a Red rating. The key contributors to this rating are the Fund’s high costs and poor performance”.
Particularly noteworthy was that the CFA group scored the 9 template reports produced by the AFMs that are commercial service providers in the category of what we call ‘rent-a-fund-management company’ scored 35% on average. The CFA group also noted that most reports produced by these ACDs were also not available on the delegated investment manager’s own website.
Are AFM NEDs representing consumer interests effectively?
Non-executive directors (NEDs) of Authorised Fund Managers are specifically tasked with oversight of AoVs in the FCA COLL Rulebook section 6.6.26: “The role of the independent members should include providing input and challenge as part of the AFM’s assessment of value in accordance with COLL 6.6.20R” and these directors are required to “have sufficient expertise and experience to be able to make judgements on whether the AFM is managing each scheme in the best interests of unitholders under section 6.2.25.“
Bear in mind that the cost of these non-executive directors is ultimately borne by fund investors. As the FCA put it in its Policy Statement:
“The costs would flow through the AFM (i.e. that the AFM would charge the fund an additional amount to cover the payment by the AFM of the salaries and other costs associated with the independent directors).”
The directors are chosen by the entity concerned to address its particular needs. Can AFM NEDs really challenge AFMs effectively enough Judged by AoVs, this may not always be the case. Some NEDs may need greater confidence to do this – where some training could play a role or are they just members of an expensive luncheon club?. To judge by some AoVs, their AFMs do not appear to perceive that any challenge is needed or indeed .
How can AoVs be improved?
More objective, shorter, less wordy, better comparators, graphics not text. Self criticism may be a virtue but self flagellation is unappealing to commercial organisations that need to sell their products. To have to say that, for example, your fund was bottom quartile for performance and top quartile for costs is hard enough. The metrics are unavoidable. But the need to tell the world that your customer service leaves a lot to be desired is a message that is easier to soften. So NEDs have an important role not only in putting pressure to improve the quality of AoVs but also. more important, to challenge, and ask awkward questions about less obvious failings more deep seated than the facts that they presented with in board papers. They will benefit from understanding the business better, and here comes the promo“
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