Value assessments – no answers without questions!

Fund boards not changing tack on performance in value assessments despite backlash

Fact not spin

When it comes to performance reporting, investors want fact not spin. They want to be told facts about what they get out of an investment in a fund and they should be able to turn to value assessments for facts.

Facts on redemptions

It’s a little known fact that the price you get when selling units in a fund is not necessarily the published price on the day you sell. It is the price that you are given by the fund manager and it swings around depending on market forces. These forces can be influenced by your fund manager’s skill (or lack of it). I have seen no evidence of an assessment of the value fund managers are bringing to this aspect of the management of their funds.

Facts on transaction costs

The costs incurred by selling and buying assets in the fund are critical to the performance of the fund. Buy at the right price and sell at the right price, look for liquidity and manage your spreads, these aspects of fund management are not discussed in value assessments and managers not rated by their capacity to get these decisions right over time.

Facts about the use of funds

Funds are used in many different ways as the investment pathways introduced by the FCA show. Some funds are bought to hold, some to be redeemed for cash and some are bought to be drawn down. Some funds form part of tactical switching patterns, such as the lifestyle matrices employed by workplace pensions.

Different funds have different uses, you don’t want a high volatility fund to be partially redeemed as part of an income drawdown strategy – better take its natural yield. If you are consistently selling units as part of lifestyle, you need to make sure that you are consistently getting value on your redemptions, if you don’t want liquidity, make sure you know your fund is giving you an illiquidity premium. These are things that a value assessment could and should be telling an investor.

Facts on performance

I’m not interested in the performance figures dished out to me by a fund manager. I’ve been in this game long enough to know that they can be manipulated to tell me what the fund manager wants me to believe. I want to know how performance impacted on the outcomes of a range of people in real life.

I want to know what the internal rates of return achieved by savers actually was and how that compared with the IRR that the benchmark would have given them, whatever benchmark was chosen by the fund. I want these numbers to be run with real not imaginary charges and I want the impact of the implicit spreads in the single swinging price to be included.

I want facts about what unit-holders actually got- not what the fund managers cooked up as theoretical returns.

Is this too much to ask?

In the excellent piece in Portfolio adviser, there is one standout comment.

‘Response to challenge was initially one of surprise from investment and product specialists’

The problem is that the right questions aren’t being asked and that is why we have Ned’s and other fiduciaries. Non executive directors, trustees, IGCs and GAAs are there to ask for the facts on funds on behalf of unit-holders, policy holders and members of workplace pensions.

We end up paying these fiduciaries to do this job through the management fees on the funds and we – the end users- have a right not just to expect these questions to be asked , but to expect answers to be given.

A change in culture required

I am grateful to Robin Powell for bringing this article to my attention and for posting it on Linked in. Here is the post and if you want to read the comments from me, Chris Sier, Padraig Floyd, Aoifinn Devitt and others, you can do so from this link.

We need to be asking the questions of the Neds and they need to be asking the questions of the funds. We will get nowhere if we do not press for these facts.

I appreciate that there are issues of agency here, that many people have advisers on whom they depend to ensure they get value and have value assessed. I am aware that many advisers do ask the questions but I believe more can and should be done to ensure that fund governance is in place. Ultimately the job of governance is in the hands of the funds industry itself. No amount of supervision can cure deep seated ills.

One fund manager told me last week that while she accepted that sunlight was the best disinfection ,she wasn’t prepared to have bleach thrown in his face. That fund manager (a she as it happened) is right. We need to conduct this conversation in a civilized manner. But we do need sunlight- we need transparency and we need facts not fund manager fiction


About henry tapper

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