The first wave of Assessment of Value (AoV) reports has represented a significant effort for fund groups and has already been hailed as a success for investors, following share class transfers, the closure or merger of poor value funds, and fresh scrutiny of consistently underperforming vehicles.
However, heading into the second year of AoVs, regulatory experts expect further action on poor value funds, with the inclusion of different value metrics such as sustainability, active management and the appropriateness of benchmarks.
All fund managers offering funds in the UK have been publishing their first AoVs since the fourth quarter of last year, following the action taken by the Financial Conduct Authority in the wake of its 2018 Asset Management Market Study.
The process requires asset managers to prepare a report for fund boards, which, with the aid of independent non-executive directors, sign off on the report before a public AoV is produced.
There is no official template for how AoVs should be presented, but the FCA has provided a "non-exhaustive list of elements prescribed for the assessment" of seven criteria: quality of service, performance, management costs, economies of scale, comparable market rates, services and classes of units.
Beyond the FCA's seven considerations
As a result of this lack of prescriptiveness, there has been a lack of uniformity in industry AoVs, iNED and author of #newfundorder JB Beckett explained, with "some fund groups having been a little cavalier in fully addressing these seven considerations" and "very few coming up with any further considerations".
Beckett said: "In year two, we will see lots of fund boards coming with additional considerations, broadening out how they perceive value, and how they want to communicate and engage on value with fundholders.
"I fully expect we will see a fair degree of tightening up, and what we will begin to see will not necessarily be standardisation, but moving towards something that resembles best practice."
One so far ignored factor that could become more commonplace in the second wave of AoVs, according to Beckett, is how responsible investment and sustainability offer value to investors.
He explained that while difficulties with quantifying sustainability measures make including them a tough ask for fund boards, "there is great scope for demonstrating how groups are delivering great value from a stewardship point of view, engagement and from deploying capital in a more responsible, sustainable way".
Beckett added: "We should be thinking about how that adds value to the customer and, more importantly, then engaging with the end customer as to why we are doing it. There is a great opportunity there."
Similarly, the AoVs, according to Beckett, are a good opportunity for fund groups to demonstrate how active management provides value amid widespread concerns about "index huggers and quasi trackers".
He explained: "There's a really good opportunity there for true active managers to demonstrate how they are adding value, and how they are doing so by taking genuine active positions by taking bets against the broad market with a fund that is focused and active.
"Demonstrating how activeness adds value, and actually quantifying activeness, would be an important aspect to end customers, as well as advisors and professional fund buyers."
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