in active UK equity. When I looked at the fees paid I found two clear indications that others had better terms than them notwithstanding the fact that they thought they were getting best terms. Looking at it overall I came to the conclusion that most were simply being quoted from a standard fee schedule, with only occasional variations above or below that schedule. NDs: These are documented. Part of the issue, in my research attempt, with some, was that their IMAs prohibited disclosure of the terms of management - in some cases even to beneficiaries of the fund. It was not uncommon for the IMA to limit disclosure even of performance figures. Our model IMA restricted disclosure to the scheme and members – no third parties. Our stated rationale was to ensure that any information in the public domain, for example with investment consultants was accurate. The truth is that we were keen to avoid disclosing the fact that broadly similar mandates could have starkly different results. There was a lot of cherry picking going on all over the place in advertising and marketing documents - and that led us to the original GIPs [Global Investment Performance] standards. They eliminate some, but far from all of those practices. One of the oldest was reporting the average return on a mandate class – we could tinker with the membership; we could report average by number; we could Edition #10
report average by value. We always reported numbers in terms of the most recent year, the average over two years, the average over three/ five and so on – this appears to be open but it confuses what you achieved in any one year or sequence. This is still standard today. I made this point to [the name of a friend] – he owns a [name of an Asset Manager] fund that has just had a stellar year, and was two or three in the two and three year averages among eight funds. When you look at how they did in each year, going backwards in time they were 1, 7, 8, which is far from as impressive. The real abuse from a transparency standpoint concerns complaints and legal actions. There is usually some publicity at the start of the process but that is where it ends. Settlements are invariably subject to a non-disclosure of terms clause; most settle on the steps of the court. I have tried asking fund managers how many such complaints and settlements they have had, and got nowhere. We should be pressing for full disclosure as part of the marketing materials. I have even come across what I refer to as super NDs. Here the terms of the settlement denied the parties disclosure even of the fact that a complaint had existed and been settled. The investment consultants are frankly [not very good] in this; they simply take the numbers fed to them by the asset managers and regurgitate them. I have seen
one instance where there was a maximum loss limit – 2% and then there were three consecutive months in which losses exceeded this, but the fund manager had reinterpreted this as a “value at risk” limit, was reporting compliance and the investment consultant accepted this. The terms of investment consultancy agreements usually make it impossible to take action against them, and it is not uncommon for these to include non-disclosure of the advice they have offered”. We believe that the FCA ought to propose remedies that deal with the adverse impact that Non-Disclosure and Most Favoured Nation clauses are having on the workings of the market generally and the achievement of value for money specifically. 10.21 Questions We would welcome views on: The likely effectiveness and proportionality of the: Single charge remedy to incentivise asset managers to control the charges taken from funds - We don’t think a single charge will adequately incentivise asset managers to control the charges taken. - Substantive and transparent disclosure is likely to be more effective so that asset owners, and their representatives, can see where the money is being spent and how much
| February 2017 | www.transparencytaskforce.org | The Transparency Times
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