The FCA’s Asset Management Market Study Interim Report has landed on PortfolioMetrix’s desk, all 200 odd pages of it. As the name suggests, this reports details the FCA’s research into the UK’s asset management sector to see if it’s working well in the sense of offering consumers (clients) value for money.
Whilst there’s plenty to digest in the report, the key result highlighted by the FCA is that overall active management doesn’t seem to be adding value – active managers charge more than passive managers and whilst some add a lot of value and others don’t, in aggregate they do not outperform.
This is a problem from the FCA’s (and society's in general) perspective as it means the market for active management is not working particularly well. Or to put it another way, the market for active funds is inefficient.
However, while an inefficient market is sub-optimal from a societal point of view, this is actually an extremely good thing for the diligent fund selectors active in that market who have both the tools and expertise to perform rigorous fund research.
The reason for this is very simple. Using a poker analogy, if you are a good poker player and you find yourself in game with other great players then, whilst any spectators get to watch a thrilling match, for the players themselves it’s pretty tough to win. It takes a great deal of blood, sweat and tears to eventually claw your way to the top as your competitors are hardworking, smart and trying desperately to do the same.
This is a bit like the passive market in the UK (although I’d argue not completely – there are still plenty of inefficiencies in even the market for index funds).
Alternatively, if you’re a good poker player and you find yourself lined up against a hodgepodge of inexperienced and inept players (some of whom don’t even understand the rules properly) then the actual gameplay is going to be pretty ragged.
Whilst this isn’t great from a spectator point of view it does mean you, as a skilled poker player are likely to find yourself in possession of a lot of chips in the long run unless you’re really, really unlucky.
From first reading, it seems that the FCA has identified the active asset management market in the UK as more like the second game I describe above rather than the first. It’s absolutely right for the FCA to focus on this as it’s their job to protect consumers.
For those that regard themselves as among the adept ‘players’ (where I feel my own company sits) finding you’re playing in an inefficient market is great news and helps in the quest to add value for clients, as well as helping to raise the general level of the game to the benefit of society overall.
Nic Spicer is portfolio manager and UK head of research at PortfolioMetrix
