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Have funds passed the value for money test?

Let’s briefly cast our minds to this time last year, when office life functioned as normal and the coronavirus was still viewed, in many circles, as a "local" problem for Asia.

One thing catching our attention was the arrival of fund “value for money” assessments under new FCA rules. From the end of January 2020, asset managers have had to assess the value offered by each of their funds and publish the findings.

We argued the reports were another tool for retail investors looking to kick the tyres on their fund holdings – while also putting pressure on high fees and underperformance. A year on, have they passed the test?

As often happens with new initiatives, the results have been mixed. When FT Group publication Ignites Europe analysed 82 value reports covering 1,573 funds in November, it found that 71 per cent of funds had been given a clean bill of health in terms of offering value.

Call me a cynic, but 71 per cent seems high given how much lower the rate of active outperformance can be – even once passive products are accounted for in the results. This in part reflects the flexibility asset managers have to reach their own conclusions – and the fact that they look beyond simple performance. The reports must account for separate metrics, including “quality of service”, whether investors are in the cheapest share class available, and if a fund’s economies of scale are being passed on (via lower fees).

This has allowed some troubled funds to bag a reasonable verdict. Jupiter Absolute Return (GB00B5129B32) lost around 20 per cent in the three years to 31 March 2020, largely due to a contrarian approach that ultimately involved it shorting Tesla (US:TSLA). The fund’s value report for the year to that same date candidly acknowledged this underperformance – but still argued the fund’s retail share class had “delivered value, although not consistently”. One bright spot for returns was a reasonable performance at moments of market stress.

Other verdicts have been less generous, if not especially forthright. M&G, in a monstrous 416-page report, was “unable to conclude” that the firm’s suspended Property Portfolio fund (GB00B89MXM58) had delivered value in the year to 31 March 2020. Over at Invesco, the underperforming UK Equity High Income fund (GB00BJ04HQ93), run by Neil Woodford protégé Mark Barnett until May last year, was found to have "not fully delivered on its investment objective".

I am taking extreme examples where investors will already tend to be aware of the problems at hand, and good can still come from the new regime. The value rules oblige asset managers to deal with problems including underperformance. This, combined with investor outflows, can force changes. The Invesco fund, which still holds a great deal of investor money, came under new management last year.

Meanwhile, when it comes to funds whose success or failure is more nuanced, I still hope that value reports form part of an investor's research process. The commentary provided can sometimes add insight – but always judge a fund, independently, against your reason for buying it.

What’s more encouraging is the additional scrutiny a value mindset brings to fees. Plenty of asset managers have moved investors into cheaper share classes, with broader fee pressure also emerging. M&G, for one, recently announced a swathe of fee cuts to offer better value.