Darius McDermott, managing director at FundCalibre, argues an obsession with cost at the expense of value risks obscuring the benefits active management can offer investors.
It has been a few months since the Financial Conduct Authority (FCA) published its Asset Management Market Study, investigating price competition and performance. The consultation period is ongoing and it will be yet another few months before we see the final report and recommendations.
Judging by the package of 'remedies' that has been proposed, the industry should prepare itself for changes to the ways in which fund fees are calculated, new requirements around investment objectives and tighter control of allowable benchmarks, among many other potential changes.
FCA Asset Management Study: Top ten takeaways
As always, we welcome any report that seeks to ensure the best possible outcome for investors. In the FCA's recent study, we particularly liked the focus on the need for clear communication from the industry and better education to help advisers and retail investors choose the right products for their needs.
It is stating the obvious to say that saving for retirement is becoming one of the biggest challenges the world currently faces. Ageing demographics in developed countries aside, prolonged low interest rates have exacerbated the issue because people can no longer count on cash in a bank account to earn decent returns.
So Andrew Bailey, FCA chief executive, makes the excellent point that "it is vital that we do everything possible to enable people to accumulate and earn a return on their savings which can meet their lifetime needs".
He goes on to suggest that the best way to do this is by ensuring competition is effective in the industry, with an end goal of "minimising the costs of investment".
Meeting goals
Although the FCA study is not intended to be an 'active versus passive' polemic, this is naturally where a pure cost focus tends to lead. And this is where we have to be very careful in our responsibility to investors and doing the best we can to help them meet their goals.
Let us not forget active funds still offer one key attribute that no passive can: the opportunity to beat the market. Has the active management sector become bloated? Probably yes. Are there active funds whose fees are unclear and not warranted by their performance? Undoubtedly.
But within the industry, there are also lots of excellent options with long track records of alpha generation.
So let us not throw the baby out with the bathwater. An obsession with cost at the expense of value risks obscuring the benefits that active management can offer investors. It is our duty to do the due diligence and research so that we can highlight only the best, alpha- generating funds to our clients.
