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FCA Cautions UK Investors about Managed Portfolios

Financial Conduct Authority
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November 20, 2016 By: , No Comments

Actively Managed Portfolios Underperform UK Market Funds

Investors in the United Kingdom have been found wanting if they opted for actively managed portfolios over market tracking funds. This news has come as a shock to UK investors, and it was revealed in a lengthy report by the Financial Conduct Authority (FCA). According to the evidence, investors have been subject to exorbitant fees which have cut into fund returns and simply increased the profitability of the fund management companies. The data was compiled over a 2-decade period and the results were startling: passively managed funds generated 44% improved returns on investments of £20,000 over 2 decades. This amounted to £14,439 more than the equivalent of an actively managed investment portfolio.

 

 

Index tracking funds preferable to actively managed portfolios

The reason cited for the poor performance of actively managed portfolios on small investment amounts of £20,000 is management fees. The FCA has concluded that these companies were making money regardless of the performance of the FTSE 100 index, since they collected fixed fees from clients over time. The underperformance of these actively managed portfolios was directly attributed to the high costs, commissions and fees that investors were locked into. Approximately £109 billion is holed up in actively managed funds in the United Kingdom. The problem with these funds is that they are simply mirror images of the performance of the actual index itself. Investors needn’t waste their time with management companies when they could simply invest in index-tracking funds.

 

Passive equity funds have management fees of approximately 0.15%, while actively managed investment portfolios have fees of 0.9%. This is a substantial difference as it erodes the profitability of the investment over time. More importantly, the FCA concluded that fees in the industry have held firm over the past decade. These range between 0.75% and 1% per annum for equity funds. However, there are an increasing number of assets being added to these funds while the percentages remain constant. This indicates an imbalance in the market. Compare this to the passive fund market where charges have come down dramatically over the past 20 years.

 

 

Investors cautioned about hidden fees when buying/selling funds

The FCA estimates that approximately 50-basis points have been added on average to the cost of equity funds. But there are also other profits that are being generated in the form of buying/selling funds. Fixed fees are not always in the interests of investors, and are largely beneficial to fund managers. There is a definite lack of transparency in the managed funds industry, and various lobbyists have been pushing for transparency. In addition to fixed annual management fees, there are also up to 13 extra layers of commissions or charges that clients are subject to. Some of these fees include entry fees, exit fees, stamp duty, transactions charges, monthly brokerage fees, administrative costs and the like. Now, it appears that the FCA has put its foot down and fund managers will be subject to much tougher regulation about fees. These rules will be put into effect after a 4-month consultation by the FCA in 2017. On the flipside, the fund management companies will have an opportunity to bolster client trust by providing greater transparency and disclosure in the future.

 

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Brett Chatz

About Brett Chatz

Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.

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