Assessment of Value regime called into question as fund closures remain stagnant

Figures from Morningstar for Investment Week showed that since 2012, the average number of fund closures has been 146, with the highest in 2012 at 191. The figures further showed that last year was below the ten-year average at 133, despite the fact the FCA introduced AoVs in 2019.

AoV reports were one of the remedies from the regulator’s 2017 Asset Management Market Study, which found evidence of “weak demand-side pressure” and “lack of competition”. The regime requires firms to consider seven prescribed criteria to assess the value of their funds and publish the results annually.

At the time, members of the industry, including Ryan Hughes, head of investment research at AJ Bell, were hopeful that it “would prove to be the catalyst to shake out those funds that were not delivering for investors and we would see a pick-up in the number of fund closures”.

At the time of introduction, the FCA acknowledged that firms would need time to refine their methodology and reporting style. However, disappointment in the process has been growing as the regime has entered its third full year.

Jack Glover, strategic relationships director at Square Mile Investment Consulting and Research, argued that while the AoVs have evolved, they still are not up to scratch.

“The first round of value assessments led to a significant number of firms saying the majority of their ranges were good value for money when clearly some of the funds that were reviewed offered mediocre value for money at best,” he said. “As a result, most asset managers announced they were putting any underperforming funds on watch, or that they were taking steps to improve the value for money (eg cutting fees). Very few appear to have been wound up as a result.” 

Last July, the regulator published a damning update that said firms were falling short and “overall, we expect more rigour”.

The statement, which followed a review of 18 fund managers between July 2020 and 2021, said that many firms “made assumptions that they could not justify,” which undermined the credibility of the assessments.

The regulator said they planned to revisit the issue in 12 to 18 months time and believed the Morningstar data would be of interest.

Samuel Meakin, associate director of equity fund strategies at Morningstar, noted that market factors were likely to have more of an impact on closure figures than AoVs with issues such as consolidation among fund groups with overlapping funds or significant investor outflows playing a role.

“In reality, there are still too many funds out there with questionable ability to serve investors well over the long-term,” he stated.

Expanding universe

Further figures from Morningstar on fund launches revealed that the UK fund universe has in fact been expanding every year since 2017 bar one (2019).

So far in 2022, there have been 56 fund launches and 26 fund closures, while last year there was a total of 152 launches and 133 closures.

Glover said he expects further increases in the overall number of funds over the next couple of years.

He added that “some the older funds may be repurposed or merged away as asset managers shift their focus for attracting investors away from them to the newer funds that they have launched”.

Closure not always the answer

There is a clear need for consolidation within the industry, with previous figures from Refinitiv for Investment Week showing that 57% of UK and EU domiciled funds are under £100m.

However, not all the commentators agreed that increased fund closures is a necessary outcome of AoV reports and indeed, are pleased with the progress the industry has made.

Veronique Morel, wealth manager at Raymond James, said the introduction of the seven “deadly” criteria by the FCA has been “helpful and essential” to wealth managers and fund buyers.

The seven criteria are the rules against which value must be assessed. They are: quality of service, performance, costs, economies of scale, comparable market rates, comparable services and share classes.

Morel added that the criteria have also served the fund managers, allowing them to “remain competitive, relevant and on top of their offering compare to peers and the industry”.

“We are all just doing a better job,” she stated. “So there are no reason why more fund closure should be expected. This would happen if less monitoring was happening like in the case of the Woodford fund.”

However, she also said a fund could close if it underperformed consistently or was not cost-effective.

Meanwhile, Hughes believes there are plenty of funds that are currently fitting that bill that are still open.

“While a fund closure won’t always be the most appropriate action for asset managers, with so many funds failing to meet their objectives, there is only so long that poorly performing funds should be allowed to stumble on,” he argued. “On this evidence, it looks like much more needs to be done to ensure investors aren’t stuck with funds that consistently fail to deliver.”