Assessments of value – Morningstar delivers a useful addition to the library of fund reports

by | Feb 8, 2021

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  • How effective and useful are these reports are for investors and advisers?

  • How should the reports be used in fund selection? 

  • Where do asset managers need to do better in the next set of reports due soon?

Pettit’s analysis uses Morningstar’s research into disclosure levels in the UK vs other countries, and includes how far the UK has to go to deliver true value to investors.

Disclosure is a huge part of many financial regulations. Regulated disclosures attempt to ensure that investors get easy access to a minimum level of essential information about the investment products available to them.

The corollary is that investors can be inundated with reams of documentation from which its hard to see the wood for the trees – prospectuses are typically intimidating, lengthy documents full of technical details in industry and legal lexicon. Annual and semi-annual reports are a bit more penetrable, typically including a fund manager overview and the latest portfolio holdings. The saving grace for investors was supposed to be the Key Investor Information Document (KID), but its successor is in danger of being a retrograde step.

UK fund investors saw yet another document added to the list in 2020, in the form of an annual Assessment of Value. And heading into 2021 and beyond, firms and products will have to publish a growing set of ESG-related disclosures.


Principles of good disclosures

The most useful disclosure requirements insist on uniformity across submissions and presentations, enhancing investors’ ability to collect information and compare products. While there’s been incremental progress in this regard, it is not something in which the UK or Europe has excelled.

When considering the clarity and consistency of investor disclosures, the US market has reigned supreme, coming out as the top market in all five Morningstar Global Investor Experience studies conducted since 2009 (with the most recent version here).


Not resting on its laurels, the SEC has circulated proposals for a new streamlined shareholder report that will raise the bar further and will make it tough for other markets to beat the US standards in years to come. The SEC realistically acknowledges that investors feel overwhelmed by, and do not read much of, the documentation they receive and aim to layer the information so that it easier to consume the most important elements.

Two Sides to Assessments of Value

UK value assessments are a ground-breaking addition to fund documentation. Fund board directors are effectively compelled to wear the hat of their investors and publish a self-appraisal summarising a thorough annual review of their fund range, concluding whether or not the services provided by their funds represented good value for the fees they charged.


The Assessment Report

The reporting was never going to score the UK highly on our uniformity measure of good practice. That’s because the FCA adopted a deliberately non-prescriptive approach to avoid inhibiting how and what firms assess and report.

Despite this FCA encouragement and their giving firms a blank sheet of paper, most firms have slavishly stuck to addressing only the seven factors specifically referenced by the FCA. It bears out a familiar trait of overly prescriptive regulation inadvertently set a ceiling, rather than a floor, to what a firm does and is a shame that the lack of prescription hasn’t encouraged firms to go above or beyond.


Realistically, as with any workplace self-appraisal, some employees see them an opportunity for some constructive self-promotion and the chance to succinctly remind their boss what they have achieved, where they fell short and why, and what to focus on going forward. It makes for an interesting and actionable review discussion. Others though, see the exercise a chore, treating the appraisal as a checklist, and providing minimalist commentary devoid of context or colour.

Sadly, more firms’ value assessments are closer to the latter than former approach. On the basis that ‘if a job’s worth doing, it’s worth doing properly’, it’s not unreasonable to expect the reports to be easily navigable, with an investor-friendly explanation of what they are and why an investor is receiving it. Good examples include Rathbone, who are one of the few to provide commentary on factors over and above the FCA’s seven criteria, talking also about corporate culture and business improvements, such as eliminating initial costs across its fund range and rewriting documentation to make investment objectives much clearer. Vanguard employs a traffic light table to succinctly show how each fund measured up against the FCA criteria, as a forerunner to a discussion of each individual criteria. Franklin Templeton also stand out for doing a nice job of presenting information on a large fund range in a consumable manner.

At the other end of the spectrum, Unicorn Asset Management’s assessment comprises the last few paragraphs of its 127-page annual report.


The Assessment Process

While the reports are a mixed bag, where there is uniformity is where all firms largely concluding that their funds have offered good value. A recent report from Boring Money found that across 26 firms, covering 968 funds, a mere 3% of funds haven’t offered good value, with a further 17% being monitored with the aim of improving the value offered. These funds that have been called out and put on special measures usually comes from performance not been meeting expectations.

At a minimum, the assessments evaluate costs of the fund, comparable market rates and the costs charged to other investors for comparable services, alongside the fund performance. On top of these, boards should explain if any economies of scale are provided to investors as fund sizes increase and justify why it is beneficial for any investors to be in a more expensive share class than a lower cost class for which they are eligible and that offers substantially the same terms. To complete the process, the quality of service provided by the firm is also analysed.


Despite the criticisms and the learning curve, the assessments yielded some quick wins for investors.

Firstly, they’ve been immediately instrumental in finishing a job started by Retail Distribution Review (RDR) in 2013, providing the impetus to finally transfer many of the long-term fund investors who had been languishing in expensive legacy share classes. And secondly, various firms attributed fee reductions to the assessment process and in some cases, restructured or even closed some funds.

The unknowns as we head into the second iteration are whether firms adjudge they’ve made the significant changes already and how the funds that were put on watch have fared.

Imitation is the Highest Form of Flattery

Whether connected or not, in the wake of the new FCA rules, ESMA, the European Securities and Markets Authority earlier this year briefed all national regulators on their responsibilities relating to costs. They include making sure all investors in a fund are treated equally and that costs charged to a fund or its unit holders are in the best interest of investors, reasonable, disclosed and don’t prevent the fund achieving its objective.

Irrespective of EU regulation, it’s likely only a matter of time before a firm voluntarily applies the assessment process to its non-UK funds, whether as best practice or to gain a competitive advantage.

In summary, while fund boards may be guilty of grade inflation in their self-assessments, we are optimistic that the quality of the reports will improve, as firms do a peer review and as the FCA take stock of this first round of reports. More importantly, until that plays out, just by virtue of the process having to be undertaken, investors have already seen material benefits, proving the adage that actions speak louder than words.

About Andy Pettit

Andy Pettit, Director, Policy Research at Morningstar, works on policy activities that support investors’ interests, develops policy thought leadership, and monitors changes in legislation and regulation that will have an impact on Morningstar and its clients. Previously, Pettit led Morningstar’s Data Research and Methodology teams, driving content strategy and developing new methodologies. He has more than 30 years of experience in the financial information industry, accumulated in data management, technology, and performance measurement standards. He has held seats on many industry standards and statistics committees and was formerly vice president of global data operations at Standard & Poor’s Investment Services.

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