Assessment of Value: The story so far
Starting from scratch
The assessment of value (AoV) reports that are being published for the first time this year have already had an impact on the fund industry.
Asset management groups have cut charges, rejigged investment objectives or even closed funds as a result of the exhaustive process, and with many managers still to publish their reports, more changes are sure to follow.
On 18 June, Fund Boards Council held a digital meeting with a panel of experts to analyse the experience of boards so far and debate the longer-term impacts of the AoV exercise.
Joining FBC’s Catherine Battershill and Shiv Taneja on the panel were:
- Philip Wagstaff, global head of distribution and chair of the fund board at Jupiter
- Anna O’Donoghue, head of product governance at Schroders
- Carole Judd, independent director on the fund board at BNY Mellon
- Richard Vincent, head of product and solutions for EMEA at Columbia Threadneedle
iNEDs have spent many hours developing the AoV reports with their fellow board members, including many ad hoc meetings outside of the regular board cycle. One director on the panel reported that, in the past 12 months, “not a day went past without either a meeting or an email exchange related to value assessment”.
For most boards, it was a process that needed to start from scratch. The Financial Conduct Authority’s (FCA) seven main criteria are not exhaustive and have given boards substantial scope to interpret each criterion and add their own, as well as decide how to weight them in terms of importance to overall value. Directors had to identify the target audience for the report and how to pitch the content to them, but also where to source the data from – and, most importantly, how to assess value.
However, the workload was not something that drew much complaint. As the same director said: “Value is integral to our product process. It’s not a distraction, it’s not something that we just have to get through, publish and put to one side. It’s been a catalyst for some changes of behaviour and for refocusing on what are very important issues.”
While there were several approaches to this, panellists broadly agreed that performance was the overarching criterion most of interest to end investors. As one panellist pointed out, “nobody goes out to buy a unit trust or an OEIC to get quality of service, they go for performance”.
Panellists also underlined the need for a careful approach to communicating more recent data. Managers reporting performance to the end of March will have been particularly affected given the pandemic-induced market crash.
A solution used by one of the managers represented was to build in an analysis of 60 five-year rolling periods of performance within the five years leading up to 31 March. This allowed a proper assessment of performance over different points in the market cycle rather than simply a snapshot skewed by the March 2020 crash. “Value is value, irrespective” of short-term performance, as one panellist stated.
Publication and actions
As FBC’s Shiv Taneja highlighted early on during the panel discussion, AoV reports are primarily a communication between fund boards and end investors (or intermediaries, such as financial advisers). As such, ease of access was of high importance.
While some reports are available as standalone documents and clearly signposted on websites, others have been included within annual reports or other documents making them less obvious to investors.
“There is so much work that goes into producing these reports – if they’re not accessible, why are we doing them other than as some kind of tick box exercise?” lamented one panellist.
While there have been instances of investment groups adjusting benchmarks or even changing the management of some funds, the most common actions following AoV report publication have centred on charges. Thousands of investors have been moved to cheaper share classes, while some have seen fees reduced. In each case, the need for clarity and consistency in presentation was vital, delegates heard.
“That’s just part and parcel of saying, ‘this is what we’ve done for you’ – which, frankly, is what the customer wants to hear,” as one director put it.
The future of AoV
Actions taken in the first year of AoV reports were likely to be the ‘easy wins’ such as moving investors to less expensive share classes, panellists agreed. Longer term, however, assessing value will have to prove itself in other ways.
“This very much is a journey, acknowledging where we can make improvements and having a process in place to execute those improvements,” said one director.
“I think highlighting the issues in the first cycle of reports this year will enable boards to keep a track of that over the course of the coming years. It can be a standing agenda item on the quarterly meetings, for example.”
One issue that will require attention in the years ahead relates to potential convergence of standards as the industry develops best practice for the reports. Coupled with the potential for further involvement from the FCA, demonstrating value and actions to secure it may become more challenging.
Automation of some of the preparation processes will be key to the ongoing success of the report, panellists said. In particular, smaller asset managers that do not have the same level of resources as the larger groups will be reliant on automated data collection and third-party inputs.
The AoV reports are in their infancy and many creases are still to be ironed out. However, the experience so far clearly demonstrates the potential to improve outcomes for clients and improve the independent oversight and governance of investment funds – the reason we are all here.