2018 was a tough year for fund managers. Markets were unforgiving and saved a lot of the angst for the last month of the year. Performance suffered and what the Financial Times labels “flowmaggedon” , where we saw very hefty outflows from funds across a wide range of asset, combined to hit the P&L accounts at fund management companies. According to the FT, the sector lost a quarter of its value in 2018.
Asset management CEO comments in the first few weeks of the year haven’t been all that up-lifting. Active fees continue to be ground down under pressure from the growth in indexed, cheaper alternatives. In US equity funds as an example it is now 50/50 between active and passive. This will continue. Here in Ireland auto-enrolment, with its cap on fees, will be further highlight the cost gap.
We have also seen this year further indications of the road map that regulators have for the asset management industry. At the start of February the FCA in the UK issued further rules for the industry on fund benchmark and fee disclosures. While there are a number of issues the key question that the regulator wants to help the consumer answer is:
“Is my fund manager doing a good job?“
Performance benchmarks come under scrutiny. Why were they chosen? Are they appropriate? How can we assess the manager’s performance relative to that benchmark? If fund managers work under a tracking error constraint, the degree of divergence will need to be highlighted.
And if the manager doesn’t use a benchmark there has to be some way for the customer to answer the same question – how do I know this manager is doing a good job. This could well be the case in multi-asset or outcome orientated-products. The level of risk taken on to deliver returns will be under the microscope.
And these performance disclosures will have to be as straight and jargon free as possible. As the CFA noted, it is about protecting those customers least able to actively engage with their investments.
Good fund managers do all of the above already – it now becomes a hurdle for all.
Regulators globally are all on the same hymn sheet so we can confidently expect a similar pathway in all jurisdictions.
In this regard it is very interesting to see what the prudential regulator in Australia is proposing, in seeking to address the issue of poor performance. Like the UK, greater clarity on performance benchmarks and investment outcomes is being demanded. But also the Australian regulator is considering intervening in underperforming funds. Whether this could mean revoking licenses, forcing consolidation etc. is not clear but it would certainly be a major step.
Brave new world.
Tradewinds 