You may have seen commentary in the financial press that refers to a Value Assessment. This is a relatively new concept within financial services, so we intend this article to demystify the subject and provide Five Wealth’s view on how the Value Assessment report can support what we do towards helping clients achieve their objectives.
What is a Value Assessment?
The Value Assessment was introduced in 2019 as part of the Financial Conduct Authority’s (FCA) new measures aimed at improving outcomes for investors. It originated directly from the FCA’s Asset Management Market Study, which stated that there was evidence of weak price competition in many areas of the asset management industry.
The new rules and guidance require fund providers to determine whether they consider their individual funds to be providing good value and take appropriate action where they are not providing value.
The assessment must be performed at least once a year. It must consider whether the fund is delivering value against stated objectives and importantly it considers the cost of achieving this objective. A report must be published each year describing the assessment they have carried out, as well as its conclusions.
To ensure a level of independence at least two independent non-executive directors (INEDs) are appointed in the role of overseeing the Value Assessment process.
How is Value Assessed?
Value is a subjective concept and therefore, firms are required to consider value against a minimum of seven criteria, which includes the cost in the context of comparable market rates, but also requires the quality of service and performance to be considered when assessing what is a good outcome for investors. The assessment is made for each share class of a particular fund and so you may find that one particular share class does not offer value, whilst other share classes of the same fund might succeed in providing value.
The finished report should help advisers and clients to consider those specific factors most important to them as an individual investor, as well as considering overall value.
The first year of Value Assessment reports has resulted in positive action in favour of investors, including share class transfers, the closure or merger of poor value funds, and detailed analysis and challenge of underperforming vehicles.
The FCA has not provided a template for these new Value Assessments, so it is up to the fund provider to decide how best to present the information, and this results in a lack of uniformity across the industry. This does not make it easy for investors to compare assessments on a like for like basis.
How Five Wealth use the Value Assessment?
As part of our initial fund research and ongoing monitoring of a fund on the Five Wealth panel, we will review the annual Value Assessment document. When considering a new fund, we would expect confirmation that the fund is considered good value on the basis of this analysis. For a fund that is already on the Five Wealth panel, we ensure that we review the Value Assessment report on an annual basis. Again, we would expect the fund to offer overall value. However, where there are concerns/issues raised about any individual measurement of value or the overall fund, we will investigate this further, assessing any potential impact for our clients, engaging with the fund group to challenge and understand the scope of the board’s remedial action and take appropriate action when necessary. Where we feel that this engagement has an unsatisfactory conclusion, we will remove a fund from the panel if we believe that it is having a detrimental impact on client outcomes.
Of course, this work will only support the existing monitoring of funds on our panel, as we already have a robust and thorough investment process to assess the ongoing performance (including cost, risk and return characteristics) of the fund, as well as identifying any factors that might impact the fund’s ability to meet objectives (e.g., liquidity and capacity, fund management or process changes). This is achieved through analysis of monthly performance and risk data, quarterly Five Wealth investment committee meetings, as well as regular contact with the fund manager and maintaining close contact with the fund group to ensure we are abreast of any relevant information and developments on a timely basis.
We do not think the introduction of value assessments is a concluded development. Several factors need to be addressed (e.g., consistency and confidence in the process of analysis) and there are also opportunities to widen the scope of these reports to the benefit of both investors and fund providers.
Moving forward, we could see greater regulation or more “best practice” guidance to improve consistency in the assessment of value and reporting. In doing so, we might reasonably expect further action on poor value funds. Whilst it is right that such action is undertaken, it may also result in more disruptive fund mergers or fund manager changes within the industry.
As ESG factors move front and centre in the industry, we might see fund groups incorporate an analysis of these factors in the value assessment, which could make it easier for investors to identify how important this is to a fund’s mandate, process, and outcomes.
Finally, in focusing minds and forcing remedial action where necessary, the value assessment may become a most important tool for the active fund manager to demonstrate their value at a time when passive investment approaches grow in popularity.