The Financial Conduct Authority’s (FCA) long-awaited report on the asset management sector has highlighted a number of issues over actively-managed funds.
Interim findings from the regulator’s Asset Management Market Study argues that passive funds could offer greater value for investors compared with active managers, noting that £109bn was tied-up in active funds that closely mirror the performance of the FTSE All Share market.
In a study of the funds market, the regulator found that some investors might be better off with passive funds. In a scenario looking at £20,000 investment over 20 years both generating the same return, the passive investor would earn 24.8 per cent more than the active investor.
Returns on a £20,000 equity fund over 20yrs*
Source: FCA. *assuming average FTSE All Share growth
The issue of fund charges was raised by the regulator a number of times in the interim report. While recognising the greater risk and costs associated with actively-managed funds, it notes that charges had not fallen in line with passive fund charges.
“Actively managed funds typically charge higher fees than passive funds, reflecting the higher costs of managing an actively managed fund,” the regulator noted.
“The annual average disclosed fee for actively managed equity funds available to UK investors is 0.90 per cent of the assets under management and the average passive fee is 0.15 per cent.”
The report added: “Our analysis shows mainstream actively managed fund charges have stayed broadly the same for the last 10 years.
“Very few asset management firms told us they lower charges to attract investment, particularly for retail investors – most believe this would not win them new business. In contrast, we found that charges for passive funds have fallen over the last five years.
“This, combined with the growth of passive investing, suggests that price awareness and competitive pressure on price is building among certain groups of investors.”
Patrick Connolly, head of communications at financial advisory group Chase de Vere, says some of the criticisms levelled at active managers were “fair comment”.
He said: “What we’ve seen in the passives world is prices coming down. In the active space, there are very many good active funds but also a lot of poor ones.
“In terms of charges, it is almost like there is a cartel: there is no price competition and very little competition to reflect performance.”
Mark Dampier, head of investment research at Hargreaves Lansdown, says the firm has not yet formed a position on the interim paper. 
He says: “The debates between investment trusts and unit trusts, the industry spends too much time arguing. Clients get confused and it turns a lot of people off, but passive funds are a good starting point.”
The regulator also spoke of drives towards greater transparency and the adoption by the industry of the ongoing charges figure instead of annual management charge.
Connolly added: “The industry needs to be transparent, it has made steps but the FCA needs to urge further change. What we need is an overall charge figure that includes everything, and is easy for people to understand.
“There needs to be rationalisation of funds in the industry. Managers need to look and see what funds add value and [there needs to be] more competition on charges.”
Calls to replace the annual management charge with an ongoing charges figure have been backed by the asset manager trade body, the Investment Association (IA).
Following the publication of the interim report, IA chief executive Chris Cummings said it agreed with the regulator’s current stance on the ongoing charges figure, adding that it provided investors with a “complete and comparable expression of investment fund charges to customers”.
However, Cummings notes that new European regulations covering Packaged Retail and Insurance-based Investment Products (PRIIP) could remove the ongoing charge figure from some fund documentation.
“This is available in the Key Investor Information Document, but will be removed in the PRIIP Key Information Document, a development that is wholly retrograde for good communication to customers,” he said.
With the interim report now open for consultation, the regulator is currently seeking feedback on some of the proposals set out in the study. The deadline for responses closes on 20 February, while the final report is due to be published during the second quarter of 2017.