Financial watchdog to highlight underperforming funds but stops short of naming and shaming

Published by Tom Bailey on 23 April 2019.
Last updated on 23 April 2019

The financial watchdog says it plans to publish statistics on active funds that have provided long-term underperformance.  

The Financial Conduct Authority (FCA) is planning to publish data on UK funds that, after fees, persistently underperform.

However Moneywise understands the regulator will stop short at naming the offending funds.

In its business plan for the year ahead, released last week, the financial watchdog says it plans to publish statistics on active funds that have provided long-term underperformance.  

The regulator will also publish data on the performance of index funds tracking popular indices.

The move has been welcomed by passive product providers. Hector McNeil, co-chief executive of HANetf, a US ETF provider, welcomes the FCA’s decision.

He says: “For too long investors have been unsure what fees they are paying and the impact this subsequently has on performance.”

Ben Yearsley, director of Shore Financial Planning, however, is more sceptical of the FCA’s move to publish performance data on underperforming funds: “The key question is what is their definition of underperforming and is it the role of the regulator to highlight underperformance?”

Moreover, it is unclear what time period the FCA will use when assessing the performance of active funds. It is also unclear whether the regulator will judge the performance of an active fund relative to its benchmark, its fund sector or indeed both.

Mr Yearsley adds: “Will they assess style and approach in their definition? I have no issue with their value for money approach - this can be looked at on many levels, e.g. active share versus cost. But underperformance is more subjective.”

The increased scrutiny on active funds by the regulator comes at a time when investors are also becoming more sceptical.

Tracker or passive funds have been selling like hot cakes over the past couple of years, now accounting for 16p of every £1 invested, according to the Investment Association.

In 2007, before the financial crisis struck, the amount held in trackers represented 6.3 per cent of the total.

There are various drivers behind the tracker fund sales boom, but the fact that they have become much more popular since the financial crisis is not a coincidence.  

During the crisis, from September 2007 to April 2009, the average fund in the IA UK all companies sector fell 40 per cent, according to FE Trustnet, in line with the losses posted by both the FTSE 100 and FTSE All-Share indices.

But for some investors, the fact that active fund managers were not able to give a better account of themselves was enough to undermine their faith in active management

This article first appeared in our sister publication Money Observer

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