There is still a "huge variation" in value assessments over a year after they were first introduced, the editorial manager at Morningstar has said.
Holly Black, speaking at Morningstar’s investment conference on June 29, said: “Just over a year in, there is a huge variation from the good, the bad and the ugly when it comes to reporting.
“It’s surprising to see such a huge variation in length, some include board statements and only half used performance figures to assess value.
“As an industry, we can all work together and strive for best practice to drive consistency and assessments of value that will deliver true impact.”
Value assessments were introduced in 2020 and require asset managers to carry out assessments of their performance, costs, economies of scale, comparable market rates, services and share classes every year.
Fund houses are required to carry out an annual assessment of whether the firm provides value for its clients, after the Financial Conduct Authority discovered weak price competition and high fees in its landmark asset management review.
Earlier this year, the CFA criticised the reports, saying fund houses were failing to meet the "spirit" of the value rules.
The city watchdog left the framework for such reports deliberately vague, instead simply mandating firms to look at their performance, costs, quality of service, economies of scale, comparable market rates, comparable services and share classes.
Andy Burton, professionalism advisor at the CFA, said he was in two minds as to whether the FCA should provide more prescription around value assessments.
He said although he initially thought the watchdog should be clearer, he had begun to change his mind as the regulator seemed to be doing more work with investment houses behind the scenes.
“By pushing the responsibility onto clients, it's empowering them to produce better reports,” he said.
Black gave some advice to firms, including who to pitch the reviews to.
“One of the things the IA has heard from firms is that they don’t really know when they’re writing an assessment of value report where to pitch it,” she said.
“It should be pitched to everyone, the more people who can understand a value of assessment report the better.”
She added firms should ensure the documents are easily accessible.
“The IA said about 11 per cent of the funds it looked for it couldn't find without using google or another search engine, the CFA’s own study said about 25 percent of assessments couldn’t be found on the fund’s website.”
She added firms should look to reduce jargon, include more detail on performance and objectives, active promotion of the reports and for firms to close legacy share classes and chronically underperforming vehicles.
Burton said in the CFA’s review of a number of value assessments, the quality of service criteria was where the reports performed least well overall.
“One of the reasons for that is that it’s a very difficult subject to get across to retail investors.”
He added some of the best examples he saw used video as the way to get their points across instead of large bodies of text.
Gavin Corr, head of due diligence and manager selection at Morningstar, added firms should not be creating their own benchmarks.
“Asset managers were creating their own peer groups by which to benchmark their performance - [this is] not appropriate, it’s like marking your own homework,” he said.
“Focus on the pound costs and the tangible implications for investors of being in overpriced funds or the wrong share classes.”
Corr said assessments of value were ultimately improving the outcome for investors.
“This is a really important piece of regulation that is having a demonstratively positive impact on the asset management industry.”
“However, there is more work to do. Independence is vital when it comes to reporting, so don’t mark your own homework.
“This will raise the bar when it comes to confidence in reporting.”
sally.hickey@ft.com
