Are fund managers transparent enough?

Ferdi van Heerden

Ferdi van Heerden

The fund management industry has come long way over the past decade with regards to improved levels of disclosure in fund documents.

There is now far more information publicly available on funds, classified across a multitude of fund categories in terms of investment type, style and mandate, as well as risk parameters.

This did not happen easily and mostly came about through regulatory interventions that required better and more consistent disclosure.

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And as in any industry, there are some fund managers who are more transparent and consumer-minded than others.

Why is transparency in funds a necessity?

There should be no question about the need for clear and unambiguous information in fund documentation.

For retail funds, it is important for this to be in a consistent format and in plain language that is likely to be understood by retail investors, allowing for comparisons against investor needs and competitor offerings.

UK investment managers are responsible for more than £7.7 trillion in assets under management, of which circa £1.1 trillion are managed in UK retail funds.

The decisions to invest in these, whether taken directly or in consultation with an adviser, are inevitably based on the funds’ documentation, rating agencies’ views, as well as accreditation by fund platforms.

Hence, retail investors and financial advisers must be able to fully understand the products they use, and funds they are invested in.

Although disclosure is generally better than before, it is still pretty much a very challenging if not impossible task for retail investors to look through the documents and know exactly what they are getting in terms of potential capital growth or income and at what cost, and to understand the risks they are potentially exposed to.

The drivers behind improved transparency

The need for clear, concise, unambiguous information is of course not a new debate.

The Plain English Campaign for example was launched in 1979, advocating against the use of jargon and “gobbledygook” in public documents to enable people to have access to clear, concise information.

To date, there are 23,000 documents from 1,600 organisations that carry their “Crystal Mark” for using clear language.  Although meaningful, this remains a small drop in the ocean.

Perhaps this best explains the difference between voluntary change and enforced regulated change.

Industries typically do not easily change themselves and like to maintain the status quo as long as possible – the fund management industry was (is?) no different.

Hence the main driving force behind the improvements in disclosure over the past number of years was the regulator, in the form of the FCA and ESMA for UK funds.

Increased regulations and industry reviews over the past decade have greatly influenced the levels of disclosure, mostly for the better.

RDR (in the advice space), MiFID II and PRIIPs (funds and products), the Asset Management Market Study, and the Platform Market Study, to name a few, resulted in far reaching changes to laws and regulations governing the fund management world.