With geopolitical shocks and uncertainty defining most of 2016, it was always going to be tough for fund managers. Institutional investors however, would be forgiven for having expected more in the performance and service they have received.
Performance – D
The performance of the active equity managers this year has brought down the class average considerably. Despite various warnings over the years, this cohort is still flattering to deceive in terms of returns and flows, giving the rest of the class a bad name. Formerly star pupils, diversified growth funds have also struggled this year with, in many cases, exceptionally sub-standard performance.
At the same time, open-ended property funds were the subject of significant negative press, with some of the UK’s biggest suspending for several months after they were unable to handle the swathe of investor redemptions requests following June’s shock Brexit vote. The class needs to ask itself whether these investment structures are really the best way to invest in what is an illiquid asset class.
Areas of optimism for the class come from, predictably, passive funds who continue to show their active classmates how it should be done in attracting investor money and keeping costs low.
Active managers in niche areas such as illiquid alternatives, including infrastructure and direct lending asset classes, also managed to provide the type of stable, dependable returns this school has come to expect as standard, regardless of the volatile macroeconomic climate.
Behaviour – E
The class has been struggling with behaviour issues for a while now.
Despite producing an essay insisting that hidden costs in fund management amounted to the “Loch Ness Monster of investments”, many in the industry remained skeptical. Indeed, it came just a couple of months before the Financial Conduct Authority added its influential voice to the mix with its scathing interim report on the class in November.
It criticised active performance, transparency and the level of fees charged by many active managers, who also need to think long and hard about the £109 billion worth of “partially active” funds that the FCA identified in its report. On the passive side, closet indexing has been a subject of focus for regulators, not only in the UK but also on the Continent.
And the FCA saved its harshest critique for consultants, who until very recently, had been teacher’s pet. Question marks over their ability to choose the best fund managers, their susceptibility to corporate hospitality and their all-round transparency have shocked the class and meant that for once active asset managers are not ending the year with the highest number of detentions.
With the FCA recommending to the Treasury that consultants should now be officially regulated for the first time, as well as a possible Competition Commission investigation hanging over them, one should not be surprised by more poor grades next year.
Areas to work on
The whole industry – especially asset managers and consultants – needs to take a long-hard look at itself over the festive break and realise that significant trust issues still exist with its clients, both retail and institutional. Transparency and pricing are key areas of concern – active managers need to ask themselves why they have shown next to no inclination to reduce their fees in recent years, while their passive counterparts have continued to slash prices.
Consolidation could also be a solution for mid-sized fund managers continuing to feel the squeeze, with the October merger of Henderson Global Investors and Janus Capital a possible blueprint for some. Bright spots for the industry next year are its ongoing and largely laudable shift towards integrating environmental, social and corporate governance investment factors across its mainstream investment strategies, as well as its willingness to hold corporate bosses increasingly to account in terms of fair and executive remuneration.