Assessment of Value Reports fail to meet the needs of investors

• New analysis by the CFA Society of the UK (CFA UK) reveals that many reports on fund value do not meet the spirit of the FCA requirements
• The reports are now legally required following the introduction of PS18/08 in 2018 but standards vary significantly
• While reporting on fund performance was generally adequate, reporting on risk, liquidity and ESG factors was largely missing, despite the latter being a clear area of investor interest
• There is a need for a more clearly defined set of sector-wide recommended practices

CFA UK today releases a Review of UK Fund Assessment of Value Reports, analysing how UK fund boards have been reporting on fund value.

The review follows the introduction of PS18/08 in February 2018, in which the FCA tasked UK fund boards with producing an Assessment of Value (“AoV”) statement for each of their funds. It has been compiled by a working group of investment experts and analyses AoV reports for 2019-2020 published by a target list of 145 UK investment firms and accounting for funds with £1.3 trillion assets under management. The reports were reviewed using the FCA’s seven criteria and a suggested framework for AoV reports, published by CFA UK in 2018.

The standard of AoV reports varies substantially and a significant proportion of reports aren’t up to scratch, according to the findings. Close to a quarter of AoV reports (24%) did not clearly outline their investment objectives, which was one of the few specific requirements outlined by the FCA. Likewise, more than two-fifths of reports (42%) failed to state the ongoing charges figure (OCF) at individual fund level – one of the most basic features that ought to be available to retail investors.

The majority of reports are also failing to provide other information that is important to investor interests. For instance, more than three quarters of the reports (76%) made no reference to ESG or how / if value was being provided in this area. Sixty-two percent of reports also failed to mention risk and 87% declined to comment on liquidity. Although comment on these three criteria was not officially required by the FCA, they represent important considerations for investors that should be accounted for and are missing from the majority of reports thus far.

The worst areas of reporting overall were on quality of service and authorised fund manager (AFM) costs. Methods of assessing quality of service were especially unclear. Only approximately 20% of reports used customer surveys or independent external assessments and even less provided transparency in the form of quantification of results.

Additionally, the working group identified a widespread issue of AoV reports not being easily available to investors. The group were only able to locate 75% of the target reports, despite multiple efforts by phone and email to the firms in question and / or their Authorised Corporate Director (“ACD”).

Conversely, the reports that were identified and evaluated scored relatively well for accessibility and general presentation. The FCA’s guidance was widely-framed and, in many cases, the group was impressed by the creative thinking that went into the design of many report features to make them more digestible. The better reports often displayed data in an attractive format, using tables, charts and graphs or even short video content to reduce the volume of text.

Reporting on fund performance also scored higher, with 11% of reports being awarded full marks in this category. In particular, in recognition of the fact that value is relative, significant effort has been made by fund boards to compare investments against peer groups or benchmarks, with almost two-thirds of reports comparing their fund to an index. However, 58% of reports did not quantify their over- or under-performance, making many of the net performance details relatively meaningless for investors.

A handful of reports also scored very well overall across the five FCA costs and charges related categories, despite this being a weak area generally.

Overall, taking into account various criteria, the median percentile score ascribed by the working group to UK reports to articulate their effectiveness was 50%; the scores ranged from 4% to 90%. However, the more recent reports were generally of a higher quality than the earlier reports, indicating progress. A dozen-or-so were very strong, meeting all of the FCA guidelines and containing innovative features and/or value-adding information that pulled them clear of the pack.

Says Andrew Burton, Professionalism Advisor at CFA UK and part of the working group for the review:

“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. 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.

“We, as a profession, need to help fund boards to improve the quality and standardisation of these reports. It’s not only a question of just meeting the FCA’s criteria. There are various elements not specified in the PS18/08 regulation – like ESG – that warrant attention and should be incorporated. The investment sector has an opportunity and a duty to exceed the minimum requirements and make these reports genuinely useful.”

Says Will Goodhart, chief executive of CFA UK:

“A number of the reports analysed were excellent and the improvements in quality seen over the course of the year also indicate that publishers are learning from what others in the sector are doing and responding to negative feedback on some earlier versions.

“However, the overall weaknesses of AoV reporting needs to be addressed so that we can make these reports genuinely useful to investors. We should regroup as a profession to identify a clearer set of recommended practices that fund boards can use when compiling these reports. These recommendations should be developed based on good practice and with support from the FCA.”

Recommendations for AFMs

Inspired by the best features of the reports reviewed, CFA UK provides various recommendations for AFMs. These include:

1. Publish the AoV report clearly on the AFM website alongside other mandated documents such as the Fund Factsheet and the KIID. Consider whether a retail investor can easily find the report with a Google search
2. Use user-friendly language and break up text with tables, charts and diagrams
3. Disclose the OCF and a breakdown of its material constituents
4. Disclose investment objectives and the appropriate investment time horizon
5. Quantify over- and under-performance
6. Include commentary on ESG inclusion, risk and liquidity
7. Use an independent peer group category or benchmark so that investors can compare rates and quantify relative performance
8. When assessing quality of service, use independent assessments and / or customer surveys where appropriate
9. Improve the explanation of how Economies of Scale should be interpreted and provide more quantified guidance as to how this has already or will translate into future savings for retail investors
10. For those funds with multiple share classes, include an explanation of each share class and state the fee for each