‘Value statement’ rules leading to closure of poor investment funds

Investment firms now need to prove that their funds are providing value for money.

If you’re planning to invest in funds, there’s certainly no shortage of choice. In fact, it can be downright dizzying, the sheer number of funds to choose from, whether you want to invest in the UK, Europe, or the rest of the world. 

But it’s still all too easy to find yourself invested in a mediocre fund, which doesn’t deliver the returns you expect, whether through poor management or overly punitive funds.

And there has been little by way of consequences for the fund houses that provide these mediocre funds.

However, new rules introduced this year force investment firms to be far more transparent about the value for money their individual funds provide. And it’s already making a difference.

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Honesty is the best policy

Last year the Financial Conduct Authority set out its expectations for asset managers to publish value statements for the funds they offer.

Its previous investigations into the sector had found that individual investors like you and me are simply not provided with enough relevant details in order to make properly informed decisions about whether a fund is really a good option for our investing strategies.

As a result, as well as providing more information about a fund ‒ such as its objectives ‒ from the outset, they will also have to publish ‘value statements’ each year.

In effect, they have to make clear that the funds really are providing good value for money to those investors who have put in their hard-earned money.

The idea is that this added transparency will force asset managers to raise their game, and ensure that they only offer competitive funds rather than naff ones.

Removing funds

Encouragingly, these rules are starting to have an impact. Investment firm Jupiter confirmed this week that it had ditched three funds over the last year, after concluding investors’ could be served “more effectively” through other products.

Two of them were only closed this month.

As well as ditching the underperforming funds, Jupiter also moved to reduce the ongoing charges figure on 21 of its 40 funds which are still available.

It’s not the only fund house to respond in this way either, with Baillie Gifford closing down two active gilt funds. 

It’s clearly welcome that some investment firms are seeing the opportunity to up their standards, and make sure that investors are getting something back as expected.

But it’s fair to say that not everyone has responded in the same way, particularly in terms of how these value statements are presented.

Some businesses, such as Hargreaves Lansdown and Vanguard, have put together standalone reports. As a result it’s easy for investors to access the information, and see just how these businesses justify their assessment that the funds offer good value for money.

Others have taken a different, and rather less detailed approach. Aviva for example has a page, assessing the value of all of its funds in one go, in its annual and financial statement report. 

The trouble is it’s back on page 681.

Giving investors what they need

The FCA has given fund firms a lot of freedom in precisely how they handle these value assessments. 

While it set out a list of seven aspects which should be included when working out whether value for money is provided ‒ quality of service, performance, management costs, economies of scale, comparable market rates, services and classes of units ‒ it was keen to emphasise that this is very much ‘non-exhaustive’.

Some have taken up the challenge here and broadened out the way they assess their funds, with Rathbones for example including ‘culture’ in its assessments.

But this freedom is also leading to a significant variance in just how these assessments are being presented to investors. Sticking them in a paragraph or two at the back of an annual report isn’t really good enough in my view.

This is just the start for these value statements. In the months and years to come we will see different approaches, as more and more fund houses publish them.

They have the potential to make a huge difference to investors, not only helping us make better decisions but also push fund providers to drop underperforming funds altogether.

But that will only happen if those fund providers engage with it properly.

Sticking a paragraph or two on page 600+ of an annual report is not exactly in keeping with the spirit of the rules, and won’t make the slightest bit of difference to anyone. The FCA needs to be ready to step in when firms don’t go far enough.