“Smiling at delinquents”; how we prevail over fund ignorance and indolence


Delinquency; petty crime – most people grow out of…

I had one of those moments just now, when a whole load of things came together and I saw the wood for the trees.

My Eureka moment? I was reading an FCA document , the Packaged Retail and Insurance-based Investment Products (PRIIPs) Call for Input.

Particularly I was reading paras 3.6 -3.22 where the FCA discuss feedback to objections from fund managers to reporting transaction costs using “slippage”.

What set me going was that the FCA were commenting on the mistakes they’d identified in fund manager reporting leading to perverse results – especially “negative transaction costs”. Negative transaction costs means that an investor is doing well out of the buying and selling within a fund.

One consistent set of comments from the FCA was about patience. The FCA are being patient with managers who are not used to reporting the actual costs of a fund

Many firms use systems that calculate slippage costs. But, for many other firms, we recognise that this is an entirely new area of disclosure, and one where firms might be facing unexpected technical issues. (3.10)

and they are prepared to wait for the numbers to average themselves out. This relates to both time

Like slippage costs, the tracking error approach is more accurate at the level of a portfolio over a long period of time than at the level of an individual security.

and over the breadth of a portfolio

The PRIIPs legislation requires slippage to be calculated across all transactions for a product over a 3-year period. When slippage is calculated over many transactions, this random element should average out to approximately zero

This patience extends to accepting that some fund managers are deliberately choosing numbers to report on , that create negative tracking error, perhaps in the hope of bringing slippage into disrepute, perhaps to give their execution teams – some internal lustre – who knows!

No need to shout!

There is a self-confidence in the paper which led me towards my Eureka moment. Why were the FCA displaying this patience, why no iron fist and why no headlines?

This confidence suggests to me that the FCA know they are getting it right. I find the same confidence in the work of the DWP’s disclosures team.

There is no need for the paranoia of yesteryear, where transaction costs were still feared to be a Loch Ness Monster (more talked about than seen). The FCA now has evidence of slippage within funds. Here is the chart for those reporting using PriiPs.

slippage chart

and here is the much larger sample of unpackaged funds reporting under MifidII

slippage chart 2

As you would expect, for the majority of funds, slippage tends to zero, but in both charts there are significant outliers in positive slippage and a few firms reporting negative transaction costs.

The shape of these charts suggests that as time and breadth of analysis increases, the shape of “slippage” will emerge.

This is why the FCA are showing confidence. Big data is proving them right – despite outliers and the odd case of deliberate falsification.

My eureka moment

It’s taken me 500 words of text and a couple of charts to get me to the exciting bit, the moment when I realised that ordinary people can really benefit from all this work, but here goes.

Instead of crying foul about the funds industry, us consumers now have the power – in this data – to take back control of how and what we buy.

We do so by understanding what good looks like and refusing to accept anything less. If we – the consumer – can feel confident that our fund manager is reporting in a proper way, we will take the fund manager seriously. If a fund manager is found to be misreporting or not reporting at all, we simply won’t use that manager.

This is how we win.

What Mifid II and PriiPs are doing, is sorting out those organisations that are a) competent and b) have integrity, from those who don’t. The simple process of demanding proper cost disclosures and rating organisations on their capacity to report becomes the first screen in the fund governance process. A detailed analysis of the efficacy and efficiency of the fund management, is the second screen.

If the templates to ensure that this reporting is done, effectively capture what is going on, then we can take a giant step towards understanding both the “value” and the “money” elements of a fund’s performance. For such a template need not just capture the cost of performance, but the performance itself, Slippage works by comparing gross and net performance, performance is ultimately the only measure of value for a fund.

Creating a world where transparency is business as usual

That advances in data science, now makes the analysis of so many funds “business as usual” for the FCA, gives grounds for optimism. We are working in the purlieu of the achievable.

But the capacity of us to convert this data into information that ordinary people can act on is still some way off.

This week, I’ve been working with the Sun newspaper on the intractable problem consumers have, of comparing one pension pot with another. People expect there to be a way for this to happen, so does the Sun newspaper. Everyone is surprised and disappointed that there is no pension aisle in the moneysupermarket, no way to compare the pension market. We need to find a way to link the work that the FCA and DWP are doing , making Priips and MifidII work for professional buyers of funds, available to the ordinary person in the street.

My Eureka moment is this; we do not have to worry that we are chasing the market, in this world where transparency is achievable and is becoming business as usual, the problem is no longer ours, it is with those who want to remain in the shadows.

Like the FCA, people like me, who aspire to provide ordinary people with a way of showing the value for money of their pension products – can be patient , need not shout and can even smile at short-term delinquency!

agewage vfm



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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