FCA: ‘We are not pro-passive’

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The FCA has rejected claims its findings into competition in the asset management sector are skewed in favour of passive investing.

In its asset management market study final report, published today, the FCA set out proposals to reform fund management after the regulator found evidence of “weak price competition in a number of areas of the asset management industry”.

Following its interim findings in November, the FCA received 153 written responses and spoke with almost 200 stakeholders from 135 organisations.

The regulator says it has also carried out further work in response to industry feedback.

But the FCA pushed back on suggestions made in the wake of the interim report that the regulator was attacking active management.

The FCA says: “One point raised in the feedback, which we want to address, was a perception that our interim findings suggested passive funds were preferable to active funds.

“This is not the case. Rather than focusing on one strategy over another, we think it is important investors understand both the total cost of investing and the objectives of the fund or mandate they are investing in, so that they can choose the product that best meets their needs.”

The regulator says its further analysis found that both active and passive funds failed to outperform their benchmarks after fees, for both retail and institutional investors.

It adds: “Our additional analysis suggests there is no clear relationship between charges and the gross performance of retail active funds in the UK.

“There is some evidence of a negative relationship between net returns and charges. This suggests when choosing between active funds investors paying higher prices for funds, on average, achieve worse performance.”

Vanguard says its research supports the FCA’s findings.

Vanguard Europe managing director Sean Hagerty says: “Our own proprietary research demonstrates the impact of cost on performance. Our findings show too many funds fail to meet their performance benchmarks, largely because of the charges they levy.”

He adds: “As an industry, we have an opportunity to reassure people investing can be a force for good, and for many people, a sensible way of providing for the future.

“This includes ensuring investors have access to all the information they need, including costs, in a format they can understand. The increased transparency proposed by the FCA will enable an informed investor to choose high quality, low-cost products which will lead to better financial outcomes for UK investors.”