Richard Buxton: The FCA is "definitely pro-passive"

David Brenchley
14 December 2016

The Financial Conduct Authority (FCA) is "promoting passives" through its recently published study of the asset management industry, says Old Mutual chief Richard Buxton.

Mr Buxton, manager of the Old Mutual UK Alpha fund, says he is broadly supportive of the FCA's investigation, admitting there "clearly is a swathe" of closet tracking funds, "and it's quite right for the FCA to call that out and say it's not right".

However, while he believes clients may go passive for an element of their portfolio, he says there's also plenty of investor appetite to pay more for funds with a high-conviction investment strategy, "as long as it is high alpha, not closet index tracking".

In this case, 'alpha' is used to describe the difference between what a fund has returned compared to the benchmark it's set against in the case of a positive performance.


Not comparing apples with apples

In its long awaited report into the asset management industry, the FCA last month said it found 'weak' competition in the industry and criticised fund charges, noting there was a lack of both competition and transparency for investors.

The regulator suggested a number of remedies, including an 'all-in-one' fund charge to replace the current ongoing charges figure, which omits key charges including transaction fees.

"I think [the FCA has] got a very price-conscious mindset," Mr Buxton explains. "They're definitely pro-passive.

"They are right that a lot of advisers seem not to promote passives so it is under-recognised [but] I'm sure that if Vanguard makes a massive push in the UK then it will become more wider known and understood."

Mr Buxton also criticised a chart in the report (above) showing that passive equity funds have outperformed actives over a 20-year period if you include the OCF plus explicit and implicit transaction costs.

A note to the table states the results are "based on 100% portfolio turnover per annum for active and 10%... for passive funds". "Well my turnover is 15-25% per annum, so that's not really comparing apples with apples," says Mr Buxton.

  • *Note: These charge figures represent industry average charges for active and passive equity funds in 2015. Along with average brokerage costs based on 16 firm responses and implicit charges as estimated by ITG and based on 100% portfolio turnover per annum for active and 10% portfolio turnover per annum for passive funds. These charges are for illustrative purposes.


This story was originally published for our sister magazine, Money Observer.

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