Fund research and ratings agency Fundhouse has published the inaugural track record for its fund recommendations in response to the FCA’s increased scrutiny of ratings providers.
CEO and co-founder Rory Maguire says firms engaged in active fund selection need to be transparent and demonstrate that they are “adding value to the end client” and says other firms should publish their track record.
The FCA’s three key areas of focus among fund raters are conflicts of interest, a lack of regulation, and the question of added value, Maguire says.
He adds that the first two areas have been addressed by the firm: Fundhouse does not receive fees from fund groups so its research is wholly independent and the firm received regulatory approval through the FCA’s Project Innovate in 2015.
Fundhouse is releasing its fund selection track record on the back of findings from the FCA’s Asset Management Market Study that showed “on average, consultants are not able to identify managers that offer better returns to investors.” The regulator’s period of assessment also found that “ratings and best buy lists did not on average identify funds that outperformed their Morningstar category benchmarks”.
While Fundhouse’s track record was previously available to clients to help them “evaluate whether we have a value proposition worth paying for”, it is now being published for the first time and is likely to be updated quarterly. The track record is based on the net performance of pooled fund recommendations made to clients from the time they went live, versus their benchmarks.
Maguire says: “If our active fund selection is not adding value above a passive index, surely we have no real value proposition and don’t deserve our fees? We are very proud that our track record reflects added value across the three tiers, net of fees and against market indices.
“[Our track record] is also aligned with expectations. [Top-rated] Tier 1 funds do better than Tier 2, but both do outperform. And Tier 3 is the strongest signal of all – 82 per cent of the time, a negatively rated fund underperforms. We often get asked why we produce negative ratings. This is why. It is an incredibly valuable proposition to our customers to avoid poor investments, as much as it is to invest in a good one. We hope others follow in publishing their track record.”
Investment director Andrew MacFarlane adds: “If the fund managers we evaluate live and die by performance, why shouldn’t we? It seems unfair if we avoid the same scrutiny when our role, in effect, is to also prove that we add value to an already costly food chain.”