Investment analysts have said the regulator’s review into tracker funds disguised as actively managed portfolios is long overdue, with claims the industry is “riddled” with unfair fees for index-linked products.
According to the Financial Conduct Authority’s thematic review published yesterday, seven out of 23 sample funds provided key investor information documents lacking clear descriptions of how they were managed.
Five of these used a “benchmark-related approach”, which the FCA said should have been disclosed.
Financial analysts have welcomed the regulator’s intervention in what they say is a widepsread problem for the investment sector.
Ben Willis, head of research at Whitechurch Financial Consultants, said he was unsurprised by the review, as over the years he has come across funds levying high active fund charges for tracker behaviour.
“Clearly we have avoided them but, unlike your average investor, we have the data systems to identify them.”
He said there are plenty of closet trackers in the fund universe which are charging investors an unjustified fee, although most of these are “zombie funds” which are not actively marketed, but remain viable for fund groups’ to keep open, due to investor apathy and high charges.
“What is a little worrying from the FCA’s findings is that they have found fault with funds not clearly labelling how the fund will deliver on its investment objective – and to cap it all, to levy actively managed fees for it.”
“The fund industry is riddled with practices that simply takes the mickey out of investors.” Abraham OkusanyaAbraham Okusanya, principal at research firm FinalytiQ, said this is long overdue: “The fund industry is riddled with practices that simply take the mickey out of investors.
“Really, the FCA should amend its rules mandating funds to set clear objectives in language that ordinary people can understand and how the funds should be benchmarked.”
He said rules should be introduced that mean the regulator has to notify investors where fund objectives have been consistently missed, with consequences for consistently failing to meet these standards over an extended period of time.
“Closet trackers which consistently hug the benchmark index should be required to label themselves as such. There should be no doubt in the investor’s mind about what the fund does.”
Andy Parsons, head of investment research at The Share Centre, agreed the review was long overdue, but disputed whether fund managers were being deliberately misleading, instead arguing the language is just not simple enough for most retail investors to understand.
“There have been concerns about closet trackers for a long period of time,” he commented, suggesting the FCA should have named and shamed the ones that were not clear enough, to help investors get a clearer picture.
“The key going forward, is when funds are applying to the FCA for approval for launch, more detailed explanations are needed on investment objectives.”
John James, managing director for Vanguard Europe – one of the biggest providers of passive funds – said he supports the FCA’s efforts to improve disclosure as it is “imperative” to give investors accurate and helpful information so they can make well-informed decisions.
This was echoed by a spokesman for the Investment Association, who said being clear with clients about fund aims and objectives is crucial to ensuring investors can benefit. “We are pleased that the FCA has recognised that most funds have high standards to ensure investment practices match stated aims,” they added.
katherine.denham@ft.com
