Aspects of M&G’s latest value for money assessment have been called into question, after an expert pointed out that the asset manager’s tracker fund costs some seven times more than a rival’s equivalent.
In its second assessment of value (AoV) report M&G admitted 60% of its funds “must improve” their investment performance, however the asset manager said that most of its range offers value for money.
The latest report noted the value for money it offers clients had improved, with now 92% of assets under management (AUM) delivering value, compared with 88% last year.
The improved value for money figure follows M&G’s decision to slash fees across 45 of its mutual funds earlier this year as part of an internal review of its UK range that looked at charges, performance and services by fund and share class.
The cuts affected 75% of its AUM and were applied to some of the firm’s flagship funds, including the £3.1bn Corporate Bond, £2.1bn Strategic Corporate Bond and £2.3bn Optimal Income funds.
Tracker fund stands out as pricey
But despite the widespread fee cuts, experts have continued to question whether M&G’s funds can reasonably be considered good value for money.
Gbi2 managing director Graham Bentley (pictured) points to M&G’s Index Tracker fund, which for share class Sterling A has an annual charge of 45 basis points – significantly higher than rival Fidelity’s equivalent UK Index fund, which has an annual charge of just six basis points.
Although the fund underperformed its benchmark, net of charges, over the five-year period ending 31 March 2021, M&G rated the fund “satisfactory” because the asset manager judged the fund to have met its investment objective, which is to track the FTSE All-Share Index gross of the ongoing charge figure.
“In terms of being transparent about underperformance, I think [M&G] have been as fair as a commercial organisation can be without attracting too much criticism,” says Bentley, “[but] the tracker fund example demonstrates that some companies may have a long way to go in terms of fair assessments of value versus competitors.”
Writing in the latest value assessment report, M&G Securities chair Laurence Mumford says: “We hold the highest expectations of M&G on behalf of investors and, where we believe the company could do better, we have said so in this report.
“Although we are unable to conclude that value has been delivered to all investors this year, this should not cloud the progress that has been made in recent months.”
Lang Cat consulting director Mike Barrett was more generous in his assessment of M&G’s value report.
He says the asset manager’s level of introspection was “a good thing” that indicated the asset manager was taking the value assessment criteria seriously.
Fund managers are required by the Financial Conduct Authority (FCA) to carry out an AoV annually – a change that was introduced after the Asset Management Market Study in 2015.
The study found evidence of “weak demand-side pressure” in the authorised funds market, which resulted in a lack of competition on fees and charges.
Since then, the financial watchdog has remained critical of fund managers, and just earlier this month found most managers were falling short on value assessments.
See also: How can asset managers address their assessment of value issues?
The FCA found that most fund managers had not implemented appropriate AoV arrangements, with many accused of making “assumptions that they could not justify to us, undermining the credibility of their assessments.”
M&G adopts ‘rigorous’ new criteria
For its value assessment this year, M&G noted it had changed its AoV criteria, which resulted in all funds being downgraded to “satisfactory” from “good” last year.
M&G said the change did not indicate any deterioration in the services provided to investors, but instead reflected a change to how it evaluated its assessment of value, adding that it had “improved the rigour” of its methodology, which effectively raised the bar for what constituted a ‘good’ rating.
Barrett says: “It seems a good indicator that [M&G] are taking this seriously, having revised the criteria, and is raising the bar of what an assessment looks like. I’d have been more concerned if [M&G] said every fund was great.”
He also complimented M&G’s clear signposting of non-executive directors (NEDs) in the assessment, as NEDs can challenge value for money claims in a way non-independent board members are not able to.
He adds: “I think [value assessments] are gradually becoming more effective, [but] you almost can’t answer the M&G question until 12 months from now.
“[M&G] are setting up their concerns, but the question is – what are they going to do with it? If they take action, be that improving fund performance, cutting costs, even sacking managers, then value assessments are bringing change and it’s a good thing.”
FCA’s ‘unforgiving feedback’ should spur manager reaction
Boring Money CEO Holly MacKay says M&G would not be alone in revising its assessment criteria, after the recent “unforgiving feedback” from the FCA.
But Fund Boards Council senior adviser Brandon Horwitz says rather than change their assessment criteria, firms were likely to improve their understanding of the FCA’s original expectations.
“Some of these changes will be visible in the public reports, for example more focus on customer outcomes under Quality of Service and a more demanding focus on measuring investment performance in the context of what a fund actually does (ie its strategy) rather than a generic objective (like ‘capital growth’),” he says
“Other changes will only be visible in the boardrooms and board papers – ie the focus on annual fund management costs and the FCA expecting there to be awkward conversations about the continued high levels of profits across the industry and profitability of individual funds, and if and when these profits will materialise in economies of scale being shared with unitholders.”
