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CMA market review: commentary on working papers

CMA market review: commentary on working papers

Ahead of their provisional conclusions in July 2018 and final decisions in March 2019, the Competition and Markets Authority (CMA) are releasing working papers on key issues. The CMA will use the working papers to share its emerging thinking for remedies if it concludes the issue in question requires action.

Greg Wright


KPMG in the UK


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CMA market review: commentary on working papers, illustration of hand writing on paper

This article covers our thoughts on the first two working papers, which covered "information on fees and quality” and “asset manager product recommendations”. 


CMA working paper 1: Information on fees and quality

To quote the CMA’s overview of emerging findings (and with our emphasis):

"… competitive processes are not providing customers [trustees] with the necessary information to judge the value for money of investment consultants and fiduciary managers. The potential competition concern with this is that customers are not well-equipped to choose… and in turn drive competition ...". 

More specifically:

  • Fees payable to advisors are generally clear but it is less clear for fiduciary management (“FM”) mandates. Information on third party fees is limited. DC schemes fare better for regulatory reasons
  • Changes to fees arising from strategy reviews are generally made clear in advisory mandates; less so for FM
  • Fee transparency is “below the standards” that effective competition should drive. Developments like MiFID II (which will drive greater disclosure and breakdown of fund manager costs) may correct this. However, many advisers are unlikely to be MiFID compliant because of the nature of their business, so it is only a part solution
  • FM performance reports are generally clearer and provide better focus on long term performance. Both FM and advisory reports are light on risk metrics
  • It is very difficult to get good fee and performance comparisons in advisory tenders; FM is better

Possible remedies include much greater standardisation for tenders and associated questions on fees, performance and service quality metrics. We would support much of this, to help trustees better compare and assess the answers they receive in tenders, and so choose providers with greater certainty. 

CMA working paper 2: Asset manager product recommendations

Again, emerging findings with our emphasis: "We have found no evidence to date that, net of asset management fees

  • 'Buy-rated' products outperform their respective benchmarks to a statistically significant extent on average
  • 'Buy-rated' products outperform ‘unrated’ products to a statistically significant extent on average"

This largely corroborates the earlier Financial Conduct Authority (“FCA”) analysis (which helped prompt the CMA review itself), although that study failed to find outperformance even before fees. The CMA analysis focuses on public markets where benchmark returns are available. It ignores private market strategies like direct lending (which we support and where low level active management is a necessary component).

The results do not surprise us and in fact support our long standing philosophy for pension fund investment:

  • Overcomplicating portfolios with a large suite of active managers generally doesn’t add value (and if so, do you need a fiduciary manager to do it for you?)
  • That a successful adviser does not require a large team of full time manager researchers. The key to success is to put in place the right strategy, using the right asset classes at the right time, with competent managers that you leave to get on with the job

What happens next?

Going forward, we are awating a new working paper on a weekly basis. By time of publishing, we may have received the CMA’s thoughts on market concentration and conflicts in FM, which will surely make interesting reading.

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