Closed endedApr 6 2017

Cold shoulder for independent boards for open-ended funds

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Cold shoulder for independent boards for open-ended funds

The FCA issued a damning interim report in November last year as part of its Asset Management Market Study, which aims to introduce fairer fees for consumers and overhaul fund governance.

The regulator found that open-ended funds offered weak price competition and fee clustering, especially compared with passive funds where huge inflows have allowed the funds to benefit from economies of scale.

One of the FCA’s suggestions for potential remedies was that an independent board could be added to every fund to oversee the fund manager and to monitor value for money.

In its response to the interim report, the Association of Investment Companies (AIC) pointed out that investment companies already have independent boards that effectively oversee the investment manager and monitor the level of fees paid by clients.

The trade body for closed-ended funds claimed that the existence of the independent boards had in part contributed to closed-ended funds outperforming their benchmarks more frequently than their open-ended peers over five and 10 years.

But the suggestion that open-ended funds could simply add an independent board to their fund is fraught with challenges.

Some in the industry have said the addition of an independent board to every fund would dramatically increase the costs to asset managers, and this increased cost of running funds would likely trickle down to consumers.

Added fees would compound the struggle of open-ended funds to remain competitive in a market where inflows into cheap passive funds has surged, according to Richard Scott, senior fund manager at Hawksmoor Investment Management.

He said: “It would be very difficult to make it work in practice in a similar manner because of costs.”

Ryan Hughes, head of fund selection at AJ Bell, said that investment trusts are “far from perfect”, and even the inclusion of independent boards has not insulated closed-ended funds from management problems.

Instead of adding an expensive independent board to every fund, the FCA should be more vigilant at enforcing the rules it already has in place, he said.

“This is more an issue of ensuring that fund managers follow the rules properly and the FCA holds them to account. For example, there is an existing requirement to treat customers fairly and the FCA has the power to tackle firms that do not do that,” Mr Hughes said.

“Independent boards may help in this process but it doesn’t change the existing obligations that are already in place.”

The roles of independent boards would be difficult to translate into an open-ended structure, said Charles Murphy, investment funds analyst at Panmure Gordon & Co.

“The big issue in closed-ended funds is that the board can sack the manager in extremes, I am not sure how this ultimate sanction could be incorporated into a similar role for open-ended funds especially given the use of umbrella structures.” 

Mr Murphy suggested that it may be easier to “beef up” the existing administrator or trustee roles by requiring them to report specifically on a number of issues, such as performance, scale efficiencies, and costs.