Assessment of Value – Year Two in review

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1st July 2021

As we hit the midpoint of the year, many fund boards have completed or are well on the way to completing their second Assessment of Value (AoV) report.

At FBC, we felt this was an opportune moment to take stock of how boards had approached year two when compared to year one. Examining 12 fund groups’ AoV reports from the first and second years, FBC assessed the changes made from one report to the next and how these compare to the messages we have been hearing from the FCA over the past six months.

To be clear, it is FBC’s policy not to single out or identify specific boards or reports, but all the documents mentioned in this article are available in our AoV Report Bank in the Members’ Portal of the website.

This analysis focuses on four areas:

  • The visibility of fund boards. Chairs are becoming more visible, but other members and iNEDs in particular are still invisible in many reports.
  • The remedies put in place and how these are communicated. While fee cuts and share class changes have been enacted, boards have been less certain about how to address performance issues – or how to communicate potential remedies to investors.
  • Accessibility of reports. Boards are clearly putting more thought into how they present AoV outcomes and processes through infographics and visualistions – but finding the reports in the first place is still a problem.
  • The approach to economies of scale. This is a key concern for the FCA, and approaches vary significantly. We compare some examples with the requirements set out by the regulator.

1. You won’t see me: How visible is your fund board?

Slowly, board leaders have been becoming more visible. Eight of 12 reports assessed in year one had an introductory letter or statement from the board chair, and this had risen to 10 of 12 in the second round of reports.

However, the boards themselves are less visible. Only three of 12 identified board members in some way in the first-year reports, and while this had risen to five of 12 by year two, this needs to increase.

The FCA has made it clear that it wants fund boards to become a far more important element of the overall asset management company. As Nick Miller explained at this year’s FBC iNED Bootcamp, boards form “a really critical part of the infrastructure” of asset managers and should help set the culture of a company[1] .

iNEDs can “grab hold of the reins of running the value assessment process”, according to Miller’s colleague Garry Murdoch. “You [iNEDs] need to define what that information needs to be and you need to challenge it if necessary. Just because it’s always been done in a particular way, doesn’t mean that’s the right way.”

Companies have taken different approaches to communicating the role of the board.

One company that did not identify its board members still made an effort to explain the role of the board and iNEDs in particular. Independent members’ “sole focus” was on the AoV process, this company explained, holding the executive members to account without being “distracted with other areas of the business”.

Another report that did identify its board members stated: “It is our [the board’s] job to ensure that the funds in which you invest your savings are managed in line with your best interests, both by working with, and constructively challenging, [executive] management.”

Of the five that named board members, four gave them pictures and biographies explaining their roles, their experience, and their levels of independence.

2. Getting better: Enacting and communicating remedies

Arguably the most important aspect of the whole AoV process is what actions the board takes when it is determined that a fund is not delivering value for money.

Across the 12 asset managers assessed, the reports featured more than 400 funds. Of these, at least half were highlighted for some sort of ‘remedy’, including:

  • fee cuts;
  • switching investors to cheaper share classes;
  • changes to fund objectives, fund strategies, or management teams; and
  • products being placed under review.

Fee cuts and share class switches have been described as the “low-hanging fruit” by the FCA’s Garry Murdoch. However, fund boards need to ask whether these changes are “the end game in terms of good value”[2] .

Speaking at April’s iNED Bootcamp, Murdoch said: “You can deliver value, you can deliver something positive, but is it worth the fee that’s being charged? [On] AFM costs, firms are… interpreting that as an analysis of the charges that are levied at fund level rather than the costs that they are incurring when providing the services to which the charges relate.”

By placing funds under review, the board is committing itself to updating on said review in the next report. However, often boards are not specific as to the actions they plan to take, or when investors can expect an outcome.

Across our sample, 11 funds were officially placed under review in year one. By year two, two funds had been merged away or closed, and two were deemed to have improved. The remaining seven remained under review.

However, communications regarding these reviews and what investors can expect from their boards seem vague. One board stated, when putting three funds under review over performance and fees: “The board will increase its oversight on all three funds and will provide an update in the next report.”

The FCA has made similar observations. As Murdoch pointed out in April, while some boards “have taken very clear actions”, such as strategy or personnel changes, others have been vaguer.

“Others have said that they will talk about an issue and were less clear about the timeframes and the extent of the changes they’ll make,” Murdoch said. “Nevertheless, those are good indicators… We think there’s still a lot for firms to do, a lot of areas of value to explore. Our rules set a high bar for firms when assessing value.”[3]

One remedy FBC observed that the FCA has been pushing is reviewing of benchmarks and objectives. At the Bootcamp, Murdoch said he had not seen this from the asset managers his team had interviewed at that point in time, but our analysis shows that boards are paying increasing attention to this area. Several fund boards concluded that, while their products provided good value to investors, investors could still benefit from greater detail regarding fund objectives or a product benchmark more reflective of the fund’s aims or strategy.

3. Here, there and everywhere: Accessibility of AoV reports

At an FBC digital event in November, Murdoch highlighted accessibility as an issue to be addressed – and eight months later it is clear that it still needs to be addressed.

FBC navigated to each of the 12 companies’ websites, selecting the individual UK investor option wherever possible. Four of the 12 firms had a link to their latest AoV reports on their home page, with another featuring it on its adviser and institutional home pages only. Only one of these had the report front and centre of its website.

Of the seven other websites, one had a dedicated AoV link on its main menu, making the report easily locatable from the home page. Four companies store their AoV reports in document sections of one form or another. To find the last two, FBC had to resort to the search bar – and even then one did not bring up its latest report.

(Of course, FBC members can access reports from 75 fund providers and ACDs via the AoV Report Bank.)

Other changes to formats have been observed. Firms that put their AoV reports inside their fund annual reports in year one have invariably split these out into separate documents in year two. Some that had multiple AoV documents in year one have combined these into a single document for the second year. There was a notable increase in the use of visualisations and infographics in year two reports, helping to illustrate the AoV process and outcomes.

While all boards present their reports in PDF format, one or two have been exploring interactive online versions alongside the PDF. This is an encouraging development and demonstrates some real thought going in to how the process and outcomes can be communicated to investors.

4. Don’t let me down: Meeting the FCA’s demands on economies of scale

In November 2020, The FCA’s Garry Murdoch told an FBC digital event that he had yet to see an asset manager that had properly addressed the economies of scale factor “in a way that we would expect”.

“Economies of scale is a core concept within the economics profession – it means something in particular,” Murdoch said. “When we asked firms what their concept of scale was, for example, to use as a base point to determine whether [investors] were enjoying economies of scale, they hadn’t even started to think about that.”[4]

Across our sample, there were very few examples of economies of scale being explored in detail in year one reports. For the second year, several boards made a concerted effort to explain their approaches, but these still varied widely.

One board flagged a specific area of administration fees as an area for review with regards to passing on economies of scale in both year one and year two – acknowledging that, while some progress had been made, there was still scope for the asset manager to recognise scale benefits and pass these on to the end investors.

In contrast, another board stated merely that it “assumes” economies of scale are passed on. This latter approach is unlikely to pass muster with the regulator. Indeed, at the Bootcamp, Murdoch said the FCA had also observed assumptions being made – and had begun to challenge boards on this.

Economies of scale is an area that requires more work across the industry to understand what the regulator wants, and how asset managers can deliver this more effectively. The FCA has given guidance on this, both in a policy statement[5] and final report[6] from the Asset Management Market Study. FBC members are encouraged to review Garry Murdoch’s comments from near the end of the Bootcamp session for more detail on the regulator’s thinking around best practice.

Essentially, it all comes down to profitability. The FCA wants boards and asset managers to think critically about how much margin they make on different functions, and whether this is appropriate.

Across the sample of reports FBC studied, there was significant variation in detail and approach. However, overall boards seem to be embracing the AoV process and are willing to learn from it. Thousands of customers have already benefitted from reduced fees, and many more stand to benefit in the future as boards continue to refine their processes.

[1] Nick Miller, speaking at FBC’s iNED Bootcamp, April 2021.

[2] Garry Murdoch, speaking at FBC’s iNED Bootcamp, April 2021.

[3] Garry Murdoch, speaking at FBC’s iNED Bootcamp, April 2021.

[4] ‘Assessing the Assessments of Value’, FBC summary article for event held on 12 November 2020.

[5] See p14, PS18/8: Asset Management Market Study remedies and changes to the handbook – Feedback and final rules to CP17/18, FCA policy statement, April 2018.

[6] See p42, MS15/2.3: Asset Management Market Study – Final Report, FCA market study report, June 2017.