Investment researchers have said the regulator’s review into tracker funds which are 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, seven out of 23 sample funds provided key investor information documents (KIIDs) lacked in clear descriptions of how funds were managed.
Five of these used a “benchmark-related approach” which the FCA said should have been disclosed.
Ben Willis, head of research at Whitechurch Financial Consultants, said the review does not come as a surprise, adding that over the year he has come across funds that have levied high charges but behaved like trackers.
“Clearly we have avoided them but, unlike your average investor, we have the data systems to identify them.”
Mr Willis said there are plenty of closet trackers in the fund universe which are charging investors an unjustified fee, adding however that 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. We welcome the findings as this puts pressure on fund providers to maintain clarity.”
Abraham 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 come into force that means the FCA has to notify investors when fund objectives have been consistently missed, and that there should be consequences for a fund that consistently fails to meet its objectives over an extended period of time.
“Closet trackers which consistently hug a benchmark index should be required to label themselves as such and 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 is long overdue, but disputed whether fund managers were misleading investors, 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 said, suggesting the FCA should have named and shamed those that were not clear enough in helping investors understand.
“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.