It’s fair to say some fund management groups will be feeling somewhat miffed following their launch of RDR-ready share classes in 2012.
The playing field, if not tilted, is undulating alarmingly depending on what decisions groups took and their historical distribution models, with those with a history of institutional sales seeming to have landed on their feet, albeit unwittingly. The knock-on effect, though, is that inconsistencies in the way fund managers can show the track records of funds may make it hard for advisers to rely on the numbers.
Under RDR, fund management groups need to provide clean share classes for investment funds, with adviser commissions stripped out of the charges. These share classes typically have lower annual management fees, ranging from around 0.5% to 1% per year depending on the type of fund compared to between 0.75% and 1.5% for the previous classes.
The difficulty stems from the question of what to do about a fund’s performance history if a group has launched new share classes with different charging structures and therefore no track record. Groups will naturally wish to quote the performance of a star fund with a long illustrious pedigree. Equally, new share classes could be a convenient mechanism for quietly ditching the performance history of funds that have been more lacklustre. A clean sheet could be just what the doctor ordered!
A dog’s dinner?
Near the end of 2012 the IMA and Morningstar suggested that funds adopt the performance history of the pre-RDR legacy retail share class. All well and good until you consider the groups that simply “repurposed” institutional share classes as the charges happened to coincide. Surely, they argue, it would be mad to adopt the history of a different share class when there was already a history to call on? Then there are groups that launched RDR share classes but have similarly priced institutional share classes. Perhaps it would be better if these institutional share classes were used as a proxy rather than the retail version? After all, they provide a more accurate representation of charges.
It is very easy to see how this could rapidly descend into a dog’s dinner. The IMA and Morningstar propose that a fund which happens to have an institutional share class with a charge similar to (but not lower than) that of the new RDR share class can use this as a substitute. David Holloway, marketing director at Rathbone Unit Trust Management, argues that this means “glueing together” different share classes to get the past performance. Going forwards the performance is, say, 0.5%, but going backwards it will depend on the availability of an institutional track record.
Who cares? Well, anyone in the business of fund selection certainly will. Underperforming funds can get a performance and ranking boost simply because of this fee difference. And a 0.75% to 1% charge difference over five years adds up to a big chunk of difference.
Level the playing field
The other route is not perfect but may level the field and put some confidence back into the numbers. Some groups are tending towards the adjustment approach, particularly if they have no convenient institutional record to point to. Here a track record is adjusted to reflect performance as it would have been if the lower charges had been in place.
This performance could never have been received by investors because the share class did not exist and is, arguably, therefore overstating a past return. But if the aim is simply to demonstrate how a fund has performed using charges investors will actually pay going forwards, does this matter? It may be an uncomfortable, somewhat Orwellian solution, but is it any less sinister than swapping or stitching in institutional body parts to create a history?
So where next? Under or overstated performance can both lead to wrong fund selections so advisers need to be able to compare histories on a like-for-like basis. The current proposals are under review and this is desperately needed. Currently a fund’s track record could simply depend on whether it happens to have had the right share class at the right time.
