A short while ago I blogged on the FCA’s Asset Management Market Study Terms of Reference, published in November. That blog (part 1) can be found here http://blog.ptluk.com/asset-management-time-for-a-cold-shower
Part 2 of 3 in our blog series on The FCA's asset managers market study.
In the terms document, FCA argue that the market, worth £6.6tn in 7000 funds managed by 1784 managers, is dysfunctional and asks questions on why that may be.
Having written my blog, I pondered the questions. This blog suggests one reason.
In the world of pensions, as well as with other assets holding, we have become used to paying a charge on the assets as they accumulate. This is often labelled an Annual Management Charge (or AMC).
All well and good so far.
Except it isn’t really.
For a start, AMC isn’t the only label used to describe the charge on assets as they accumulate – for more, see below.
Secondly, when AMC, or any of its contemporaries for that matter, is used it isn’t used consistently between fund managers. An AMC applied by manager A can be calculated in a completely different way from an AMC applied by manager B.
Next, the labels are inaccurate and misleading.
Finally, some managers will use more than one of these labels to describe the impact of their charges, for example, they can have an AMC (x%) and a TER (x% plus a little bit more).
Here are a few examples of what you may come across:
Annual Management Charge (AMC) isn’t the sum of annual charges although it may be most of them. Nor is it an annual charge. It is normally taken daily on a pro rata basis (e.g. x% x 1/365).
The Ongoing Charges Figure (OCF) is similar to the AMC but has the saving grace that it is not labelled annual. It is more comprehensive than the AMC.
Total Expense Ratio (TER) is usually the AMC plus some other bits. Its major problem is that it isn’t a ratio of the total expenses – some items of expense are missing.
Member Borne Deductions (MBD) is similar to a TER but is specific to DC pension schemes (it is a term defined in the law regulating maximum charges). Its problem, like the TER, is that although it sounds comprehensive, it isn’t – some items of expense are missing.
Reduction in Yield (RIY) is a sort of negative TER, it describes the reduction in the return caused by the impact of charges. It isn’t comprehensive either. It is, however, quite similar to the...
Yield drag, which is supposed to be more comprehensive that the RIY.
My point? Well its bloomin’ confusing isn’t it.
To the lay person these all describe broadly the same thing, yet to the informed expert with eagle eyes and a lot or patience, they don’t. They can, in fact, describe very different things.
Back to the market study and the dysfunctional market: a cynic might suggest there is deliberate obfuscation by the asset management industry. I don’t think so. Someone wise once said to me “assume cock up before conspiracy”. On this basis, the different terms and their different uses have grown organically from different companies and different people. We say “rubbish”, the Americans say “trash”. That doesn’t however, make it okay. If the FCA wants a properly functioning market their challenge is to fix this sort of problem.
Look out for part 3 of this series of blogs "Standardised ski fittings and investment management" next week
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