Diary of an iNED
Osmosis: ‘The Good, the Bad and the Ugly’ of AoV
What do spaghetti westerns have to do with the FCA’s requirement for Assessment of Value? Why the AoV disclosure is inevitably a learning process and what do good, bad and ugly examples look like? JB sets his sights on the first wave of examples and suggests what Fund boards can learn from them. Get ready for his opening shots.
As promised, I turn my attention, one again, back to the Assessment of Value (AoV). To witness the first wave of the good, the bad and the ugly. Indeed, I am reminded of the three key characters of the famous 1966 Sergio Leone spaghetti western film of the same name; the good (Blondie) played by Clint Eastwood, the bad (Angel Eyes) played by Lee Van Cleef and the ugly (Tuco) played by Eli Wallach. Locked into a 3-way stand-off, who shoots first may not be the last left standing?
The first crop of reports have already become key talking points on my weekly AoV call for a boutique firm that I am an iNED for. We discussed at length the latest disclosures from, including, amongst others Aviva, Vanguard and Rathbones, following the likes of AXA and since then a few others. It is worth noting that fund boards with the earliest year-end reporting are immediately put at a disadvantage as they have no sight of peer disclosures to measure themselves. Those coming later have the opportunity to take their shot last, improving their chances of hitting the mark.
Reviewing raises a good point. A well approached Assessment could be easily undermined by a poorly delivered AoV disclosure. There is no requirement to disclose methodology and so the disclosure becomes the only proxy fundholders can rely on. Noting there has been little guidance by FCA or the industry’s trade union, the Investment Association on the actual disclosure, itself, laypeople may also be duped by what appear to be well constituted disclosures and word-smithery. Yet without good disclosure how can a fund board ever hope to be fair, clear and not misleading?
Without naming names, Good things I have reviewed and liked were:
- Chairperson introduction creates some sense of proximity with the reader
- Named directors builds sense of individual accountability and lifts the veil
- Standalone disclosures rather than being buried in the annual report
- Length of 4-11 pages cover funds and considerations
- Use of matrix and ‘RAG’ dashboards to summarise the assessment outcomes
- Discussing challenges, issues and steps being taken to improve
- Showing signs of business/cultural change as a result of AoV process
On the flip side Bad things included;
- Single line assessment outcomes, standardised wording that convey nothing pertinent to each consideration
- Snap shot performance comparisons convey no sense of persistency for the fundholder base, which will invariably have different holding periods and experiences
- Using unqualified wording like “consistently”, “majority” that are not substantiated
- Amorphous references to “the Board” frankly fail to build engagement or identify different Board participants, whom are key to cultural change. No distinction was found in AoV reports to date
- No iNED presence, complete absence from the disclosure. Where is their dialogue with fundholders?
- Confusing additional considerations with minimum 7 required by FCA
- Lack of fund and share class level detail
- Lack of scoring matrix or ‘RAG’ dashboard
Lastly the downright Ugly being;
- Lack of transparency; no sense of methodology conveyed or brief unqualified statements smacks of remote tick box exercise
- Focusing on cash rate comparisons for funds invested in other asset classes yet failing to make the same comparison with primary benchmark or peer sector
- More words do not necessarily mean more disclosure
- Frequent use of terminology or discussing at length peripheral issues such as cost templates will be of no interest to an end investor and distracting
- Two lines in an annual report that abscond disclosure to an outsourced fund company
- Failing to satisfy FCA criteria for consideration or confusing considerations eg. Cost and Performance
We will not be alone in reviewing these documents. Whilst few actually expect investors to read the disclosure; self-appointed Sheriffs, deputised consumerists and pundits will have their say too. The Lang Cat and others have already commented and we can expect to read more. Eg. https://portfolio-adviser.com/rathbones-and-vanguard-set-high-bar-with-value-for-money-assessments/
Having then started from an uncertain and low bar; we should show some empathy to the first reports but when reading headlines like ‘Rathbones and Vanguard set high bar with value for money assessments’ also remain coy (for now) as to what best of breed might look like, until the last shots are fired and bodies measured for their coffins.
What should empower the AoV is the new senior manager’s regime (SM&CR), in which the fund board chair is directly responsible for delivery of the AoV. Next the minimum of two independent non-executive directors (iNEDs) are explicitly charged to challenge and approve the AoV or to note their objections. Lastly, remaining Board members are typically Executive and thus confronted by a number of conflicts of interest. When completing the AoV, iNEDs will do well to remind Executive colleagues that they are bound to SMCR to; act with integrity, due care, skill and diligence. be open and cooperative with the regulators(s), pay due regard to the interests of customers and treat them fairly and observe proper standards of market conduct. They must fully support the AoV process rather than impede it. Recall SM&CR also requires boards to:
- “take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
- take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system
- take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively
- disclose appropriately any information of which the FCA or PRA would reasonably expect notice”
What then for the fund boards yet to disclose? There is a good opportunity here to dodge the bullets. I expect we will see a gradual osmosis occur as good, bad and ugly approaches are assimilated. Fund groups may want to learn and incorporate good practices, which should raise the bar over time. We can also expect further media coverage, industry guidance and eventually FCA opine on approaches taken. So, safety off those highlighters and red pens, get ready to draw!
Until then we need to ask ourselves, do we want to be Blondie, Angel Eyes or Tuco?
‘There are two kinds of spurs, my friend. Those that come in by the door; those that come in by the window.’ — Tuco, ‘The Good, the Bad and the Ugly’ (1966) directed by Sergio Leone.
JB Beckett, FBC iNED Member
iNED, Author ‘New Fund Order’
In his monthly column, Diary of an iNED, JB will record his experiences on the boards of two very different organisations as he navigates the highs and lows of a plural career at a time when the fund industry is beset with challenges and opportunities in equal measure.
JB can be contacted at email@example.com.