Fund Managers Face Scrutiny of Flattering Use of Benchmarks

(Bloomberg) -- The U.K. Financial Conduct Authority wants asset managers to disclose more information about how they measure their performance, ramping up pressure on active funds to justify their charges.

Fund managers may have to explain why they compare themselves with particular benchmarks and also might need to provide an estimate of transaction costs for some products, the supervisor said in a statement on Thursday. That would allow retail investors to more closely compare funds across the industry.

The FCA also wants to amend its rules so that performance fees are calculated excluding other charges in all cases. The regulator will now consult with the asset management industry on the proposals.

The supervisor will also make it “easier for firms to switch investors to cheaper versions of the same fund,” Andrew Strange, a director at PricewaterhouseCoopers, said in an email. It's an example “of the regulator helping firms deliver value,” he said.

Active managers have struggled to deal with the rise of index-trackers and the subsequent pressure on fees. Last year about 43 percent of the stock pickers in the U.S. outperformed their passive peers, compared to just 26 percent a year earlier, according to a report by Morningstar Inc. Still, over the longer term active investors tend to underperform, the firm said.

The supervisor estimated in 2016 that about 109 billion pounds ($153 billion) was tied up in active funds that closely mirror market performance but charge higher fees than passive products. Some firms charged fees like active managers but operated like lower-cost passive funds, the FCA said last month. The firms paid 34 million pounds in compensation to investors in the funds.

“It is important the asset management industry, which looks after the savings of millions of investors, is working as well as possible,” Christopher Woolard, the FCA's executive director for strategy and competition, said in the statement. “But our market study found evidence of weak price competition in a number of areas.”

Asset managers have been required to seek the best transaction costs available since the revised Markets in Financial Instruments Directive and new rules investments sold to mom-and-pop investors came into force this year.

Under final rules also published on Thursday, the FCA said managers must appoint at least two independent directors to their boards and make an annual assessment and demonstration of the value they provide to investors. The FCA gave the industry about 18 months to meet the new requirement.

To contact the reporter on this story: Silla Brush in London at sbrush@bloomberg.net.

To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Ross Larsen

©2018 Bloomberg L.P.