Funds’ value reports for consumers ‘not up to scratch’

CFA UK recommendations for fund groups include making value reports easier to find.

Retail funds are falling short when it comes to transparency over the value they offer consumers, says the CFA Society of the UK (CFA UK).

From September 2019, the FCA began asking fund management companies to produce an Assessment of Value (AoV) statement for individual funds, outlining the value they were providing to retail investors. The regulator developed seven criteria for these reports to meet, including quality of service, net performance, and costs and charges of individual funds. But, in reviewing more than 100 of these reports, a working group of CFA UK members found that “the standard of AoV reports varies substantially and a significant proportion aren’t up to scratch”.

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Key information missing

Nearly a quarter of reports did not clearly outline funds’ investment objectives, which the CFA UK notes was one of the regulator’s few specific requirements. Around 42% did not state the ongoing charges figure (OCF) for individual funds, which CFA UK says is one of the most basic features retail investors should expect.

It also found that the majority of reports left out other key information that retail investors would find useful. For example, more than three-quarters did not mention ESG or how funds were offering value in this area. Around 62% failed to mention risk, and 87% did not refer to liquidity. While these three criteria were not official FCA requirements, they would have been helpful for investors to know, CFA UK argues.

The “worst areas of reporting”, according to the CFA, were on quality of service and authorised fund manager (AFM) costs, while the reports themselves were hard for investors to find online – the working group could only locate three-quarters of them, despite emails and phone calls to fund groups.

Creative design

On the plus side, however, fund groups had thought about the design and accessibility of reports, using creative approaches to make the information more digestible, using tables, charts and videos to reduce the volume of text. Fund performance reporting was also given the thumbs up, with fund returns being compared to indices and peer groups.

But disappointingly, CFA UK found more than half of reports did not quantify why the fund had outperformed or underperformed, which in turn makes some performance details “relatively meaningless” for investors.

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In a set of recommendations for fund management groups, CFA UK suggested groups make value reports easy to find via Google, use user-friendly language, disclose and breakdown OCFs, include ESG commentary and quantify why the fund has outperformed or underperformed. It also pushed for clearer disclosure of investment objectives and suitable investment time horizons, and an explanation of the fees for different share classes on funds.

‘Failing to meet basic requirements’

“While the working group did come across some strong examples, it is concerning that many of the AoV reports being produced are failing to meet some of the basic requirements set out by the FCA,” says Andrew Burton, professionalism advisor at CFA UK and part of the working group for the review.

“The rationale behind making these reports obligatory was to increase transparency about fund performance and value for investors. Many of the reports being published, however, fail to provide the quality and completeness of information needed to advance investor appreciation of their current and potential fund investments.

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“We, as a profession, need to help fund boards to improve the quality and standardisation of these reports. The investment sector has an opportunity and a duty to exceed the minimum requirements and make these reports genuinely useful.”