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New rules aim to make investing in funds clearer

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The Financial Conduct Authority (FCA), the financial regulator, has introduced new rules to improve the quality of information that is available to consumers about the funds they invest in.

All funds work towards objectives and the descriptions of these are used by savers to compare different funds and to ultimately choose which investment strategy to invest in. However, the FCA has seen instances where objectives are unclear and is seeking to remedy this by issuing guidance for asset management companies to follow.

According to the guidance, fund managers must disclose features of the investment strategy which are fundamental to how the product is managed. For example, where there is an investment style bias, such as targeting growth stocks.

If a fund manager follows a flexible investment style, the regulator says they should clarify this in key information documents.

Where a fund manager follows non-financial objectives, such as environmental, social and governance (ESG) criteria, these must be made clear to the consumer and should be treated as being no different to financial objectives.

Benchmark explanations

Under the new rules, the City watchdog will require fund managers to explain why they use certain benchmarks. Once one is selected, it must be referenced consistently through the fund’s literature.

“We have found that fund managers rarely explain why or how they are using particular benchmarks,” the FCA said.

In light of this, the FCA is introducing new rules which require fund managers to explain in a fund’s prospectus and any other communications why they have selected a specific benchmark or target to work towards.

If a fund does not measure its performance or asset allocation against a benchmark, the fund manager must explain how else consumers can assess the fund’s performance.

The aim is to provide investors with better information to explain what a fund does, how it does it and how to evaluate how well it is doing.

The FCA has also published new rules that require performance fees for funds to be calculated after all other charges have been deducted. Previously, the regulator only had guidance on this.

The rules follow the regulator’s asset management market study which came to fruition last year and presented evidence of weak price competition in many areas of the asset management industry. In some instances this has resulted in lower returns and higher fees for savers.

How to identify closet trackers

Laith Khalaf, senior analyst at investment platform Hargreaves Lansdown, commented: “Good communications are vital to helping investors make informed investment decisions. Clearer fund objectives, combined with better disclosure of benchmarks, will go some way to achieving that goal.”

Nevertheless, he notes that this will represent a challenge for the asset management industry, which all too often finds itself swamped in jargon.

“Disclosure of investment constraints is particularly useful for investors seeking to identify closet trackers, which are likely to deliver consistent underperformance and poor outcomes for consumers,” he added.

Shaun Port, chief investment officer at online investment manager Nutmeg, added: “A change in behaviour is long overdue and the FCA should be prepared to take action where firms are dragging their feet.”