Investors face the double hit of bearing the costs of fund mergers and subsequently suffering from the combined fund underperforming, the FCA warns.
In the final response to the Asset Management Study, published today, the FCA says that while the performance of combined funds tends to improve post merger, the performance of recipient funds deteriorates slightly, on average, after the merger.
“Current academic research in the US suggests that this might be due to the inability of the manager to liquidate poorly-performing assets which were held by the merging fund before the merger, or because the recipient fund becomes more conservative after the merger and chooses to hold more stocks with less systematic risk,” the regulator says.
The FCA says that as the costs of fund mergers and closures are often passed on to investors, “this may reduce the benefits of a fund merger or closure to the investor, compounding the effect that the average performance of recipient funds deteriorates slightly after a merger”.
“Firms might not have a policy in place for considering fund closures and mergers which means that ensuring good customer outcomes might not be at the heart of the process.”
In some cases, investors are not made aware of fund mergers, the regulator adds.
“Draft circulars are often not sufficiently clear and transparent. For example, they often do not give sufficient explanation about the true reasons for the merger or termination. They may also draw customers’ attention to the potential for increased investment returns following a merger, but may not give equal prominence to changes in the risk exposure, or if the cost for investors increases following a merger the letters might not contain a clear reason for this.”
As such, the FCA has called for merger circulars to feature performance information on the funds being combined to enable investors to compare data and for fund groups to let investors know when they will be bearing the costs.
“Our fund supervision and authorisation work continues to focus on making sure that investors are not materially worse off as a result of a merger,” the FCA says.
“We also continue to encourage firms to inform investors when a fund is incurring the costs of closing or merging a fund, and allow investors to access information on estimates of these costs. We believe that this information would enable investors to make a more informed decision about the likely effect of a fund closure or merger on their investments.”