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Consultant-recommended funds do not beat market, says watchdog

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Actively-managed investment funds recommended by investment consultants do not meaningfully outperform their benchmarks, according to the competition watchdog investing the UK consultancy sector.

The Competition and Markets Authority (CMA) said it found no evidence that, net of asset management fees, products rated as ‘Buy’ by consultants outperformed either their respective benchmarks or unrated products to a statistically significant extent on average.

This was based on an empirical analysis of actively-managed asset management products in a database maintained by eVestment, the CMA said.

On average, recommended products outperformed their benchmarks only on a gross-of-fees basis. Passively-managed products were excluded from the analysis.

“This analysis fits into our assessment of outcomes in terms of whether investment consultants are providing value for money in relation to the quality of their services,” said the CMA in a new working paper.

It said it decided to assess the performance of consultants’ recommended asset management products because they were “an area which potentially adds value and can reasonably be measured, and where claims are commonly made”.

It acknowledged that manager recommendations were only one part of the service consultants provided.

The CMA has invited comments on its analysis and said it would present a final version of the work in its provisional decision about whether or not there is effective competition in the investment consultancy and fiduciary management sectors. The deadline for the final report is March 2019.

The anti-trust authority said its work tested and expanded on analysis carried out by the Financial Conduct Authority (FCA). The FCA analysis – carried out in connection with its study on the asset management sector – found that “investment consultants in our sample were historically not able to pick out products that significantly outperformed (against benchmark) other products”.

The consultants included in the CMA’s sample were: Aon, Capita, Hymans Robertson, Redington, Russell Investments, Willis Towers Watson, KPMG and LCP.

Mercer was not included in this analysis because it did not subscribe to eVestment and therefore could not provide ratings data that could be matched with the database.

The CMA said it attempted to include Cambridge in its analysis, but was unable to match any of their ratings into its dataset.

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Readers' comments (2)

  • How do the consultant recommendations fare on a risk-adjusted basis? In my view that is more important than nominal return comparisons.

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  • I'm not sure if this answers your question (OK, it doesn't), but the CMA has said it might in subsequent work explore the possibility of doing the analysis on a risk-adjusted return basis. It said it could do this on the basis of the Sharpe ratio or information ratio.

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