You shall know false prophets by their fruits
The FCA are said to be unhappy with the results of its first round of value assessments. They could do worse than re-read the sermon on the mount and in particular Matthew 7 15-16. But more of that in a moment.
There seems to be a gap between what a consumer sees as good value and what fund managers do. To be blunt, consumers do not want to judge a book just by its cover. They want to know what really happened to the money they handed over and how it “did”.
These simple questions have to be the priority for value assessments, but once again financial services companies, left to their own devices have proven deficient in providing a common definition for value and too little practical help on working out what our funds are really costing us. The latter issue is particularly concerning for vertically integrated fund managers like SJP where the fund is paying for advice.
The lack of prescriptive guidance from the FCA on how managers should define value means that the first round of assessments vary widely from manager to manager. Why can’t they just tell us what we got?
Of course the absolute return of a fund is not the only standard by which a fund should be judged. If your fund claims to be invested for social purpose , you expect to see how that purpose was followed. If you decided to invest in technology , you want to know how you did compared with investing in the technology benchmark index. But the alpha and omega of value assessment has to be based on consumer “experienced” outcomes.
I think I speak for most consumers in saying that at the heart of any value assessment, we expect to see what we got for our money . The chief indicator of that is the internal rate of return on our investment over the period we gave our money to someone else to manage.
Beware false prophets
The review said the FCA was probing the process and governance behind the value assessments rather than the statements themselves.
And pleased to read co-founder of AgeWage, Chris Sier’s comment that that while cutting fees was eye-catching, it was only meaningful if accompanied by concrete steps to improve performance.
“Only if you do both will you get good value for money – cutting fees on an underperforming fund just makes a bad fund cheaper.”
The famous phrase – “you shall know them by their fruits” would seem to be one guiding principle the FCA could follow. As the FT points out
The fact that some managers with high-profile performance issues did not identify a single failing fund raises questions about whether some groups have taken a wide-ranging interpretation of what constitutes value. For example, Hargreaves Lansdown’s value report was blasted as a “whitewash” by investor campaigners for giving a clean bill of health to its multi-manager funds, despite their large exposure to the failed Woodford Equity Income fund.
Clearly many funds that failed to deliver rates of return to consumers in line with expectations they gave in their prospectus and marketing literature made claims that turned out, at least for the period of the assessment to be false.
Thinking about the context of “you shall know them by their fruits”, I went back to Matthew 7 and re-read the Sermon on the Mount
Here is verse 15 which warns of false prophets
Beware of false prophets, which come to you in sheep’s clothing,
but inwardly they are ravening wolves
and here is how you can conduct a value assessment
Ye shall know them by their fruits.
Do men gather grapes of thorns, or figs of thistles?
Value assessments on the consumer’s terms
For the consumer, the idea that a fund manager can set the homework , do the homework and then mark the homework, is difficult.
Currently only a quarter of the fund boards who do the value assessments are independent of the fund manager. Indeed, their independence is compromised by their being paid by the fund manager.
As with IGCs and commercial master trusts, the incentive to stand up for consumers when it puts at risk your burgeoning “portfolio career”, is greatly diminished.
The consumer is looking for a champion but the fund management industry seems reluctant. The Financial Times ends its report on this year’s assessment , quoting the CEO of the Funds Board Council (representing fund directors)
“The Cadbury report [on corporate governance reform] was published in 1992 and we’re still talking about it today. If we expect the fund industry to make such fundamental changes in the first year [of new rules coming in], we’re asking too much.”
Many will be reminded of the wayward prayer of a follower of Chris, St Augustine
Lord make me pure but not yet
Changing expectations in 2020
2020 has been a year when we have expected delivery on promises quickly and authoritatively. The pandemic, climate change and Brexit have made us less tolerant of prevarication and more definitive about what we want.
If fund managers think that the slow implementation of the Cadbury report can be considered a comparator for the delivery of proper value assessments, then the FCA should intervene.
I as a consumer have no difficulty in paying the right price for something, but if I can’t see what I’ve bought, how can I know if I paid the right price?
The process and governance of value assessments needs to meet consumer expectations and the value assessments I have read are simply not telling me what I paid and what I got.
We need a way to find out what we’ve got for our money and that means giving us access to our own experienced internal rates of return..the benchmark rate of return for our investment and a way to make sense of the difference.
Investors deserve no less.
Augustine by Sandro Botticelli (1480)