The environment that UK fund managers operate in has never been so dynamic. Demonstrating the value of your funds has never been this important, with vast competition, scepticism and increased scrutiny.
It’s no longer just about performance; it’s about meeting regulatory requirements and satisfying distributors. While regulation has always been there as a form of constraint, it’s now an opportunity to get ahead of the curve, and even a point of differentiation.
The Overseas Funds Regime (OFR) has recently introduced new rules which are aimed at ensuring value for investors by eliminating undue costs. Understanding and adapting to these changes will help you stay competitive and compliant. So will recognising the differences between the two regimes, and when meeting one or other is not simply a matter of regulation.
Understanding the Overseas Funds Regime (OFR) For Fund Managers
The OFR is a critical development for UK fund managers as it allows funds from approved overseas jurisdictions to be marketed in the UK, provided they meet certain standards.
This regime aims to ensure that these funds do not impose undue costs on investors, aligning with the broader regulatory framework of investor protection. By this, we mean ensuring that all fund expenses are transparent, such as providing detailed breakdowns of management fees to demonstrate their fairness.
It’s also about the justification of expenses. Managers must provide clear, detailed information about their funds, ensuring all charges are “fair and reasonable”. It helps maintain trust with investors and distributors, but really, it’s a common sense guideline that needs to be treated with respect.
In April 2024, the FCA consulted on extending the SDR and investment labels regime to portfolio managers. For example, specific labels such as 'Sustainable Focus' help communicate the objectives of the investment products.
Knowing Your Value: Assessing Fund Value
Assessing the value of your funds is always a challenge, and it involves more than just looking at returns. Over the past couple of years, some may argue there’s been a shift in focus away from a holistic view of performance, risk, and alignment with investor goals. This may be, in part, due to the rise of low-cost index funds that are generic.
However, fund managers must push back to justify their value, and key metrics such as alpha, beta, and the Sharpe ratio should be just a handful of ways of evaluating fund performance.
Another way, and a way to gain a differentiating advantage, has been to lean into the incorporation of Environmental, Social, and Governance (ESG) factors. This has been the focus of regulation, but arguably, investor interest has outweighed regulator interest.
ESG considerations can enhance long-term returns and meet growing investor demand for responsible investing. Because many investors are reconciling their personal investment goals with environmental or social concerns, this must then become a value that the fund manager also holds.
Tools like ESG scoring systems and sustainability reports can help in this assessment, but they are often flawed. Ultimately, it’s necessary to tackle ESG not as a form of box-ticking compliance, but as a core value that is embodied within your culture. This helps understand your value, at least in the eyes of many investors. It’s something that is hard to quantify into your value, but as we will discuss, some of your value can be expressed in non-numerical terms too—it’s the communication that is key.
Regularly reviewing and updating your assessment methods ensures that you stay aligned with market developments and investor expectations. A proactive approach is needed to enhance the perceived value of your funds and build stronger relationships with distributors and investors.
Demonstrating Value to Distributors
No matter your value, if you cannot communicate it effectively then your value is null.
Transparency and regular reporting are the two key components of this strategy. Providing clear, concise, and accurate information helps build credibility. But, it cannot be built on a foundation of half-truths and cherry-picked data.
Tailoring your communication to speak to the specific needs (but also expectations, which are sometimes at odds) of different distributors can enhance engagement. For instance, some distributors may prefer detailed performance data, while others may value case studies or investor testimonials. Customising your reports and presentations to address these preferences can make your communication more effective.
Comparing your fund's performance against relevant benchmarks is a rudimentary (but important) way to show its strengths and competitive advantages. Case studies, though, are powerful ways to showcase your fund's success. Highlighting real-world examples of how your fund has performed in various market conditions can provide tangible proof of its value, but it can also do this within the context of meeting ESG goals. Beyond just figures and thresholds, this is a short window to express underlying ESG values that are non-numeric.
Using marketing materials and investor presentations effectively can highlight your fund's strengths. Putting extra effort into high-quality visual aids, such as dynamic and custom charts, can pay off by displaying complex data in a very engaging and simplified way. Beyond the data itself, such strong and cutting-edge presentation skills are persuasive and position you as a leader.
Finally, it’s important to maintain open lines of communication with distributors. Regular check-ins can help address any concerns and ensure that your message is resonating, as well as strengthen your relationships.
Aligning With Regulatory Requirements
Compliance with the OFR's undue cost requirement cannot be underestimated. Best practices for achieving cost efficiency include conducting regular audits and assessments of your fund's expenses; it goes far beyond simply forming justifications for costs.
Implementing a cost-benefit analysis can help identify areas where costs can be reduced without compromising the quality of the fund. This approach ensures that every expense adds net value and contributes to the overall performance of the fund. Collaborating with legal and compliance teams can help provide guidance on the latest regulatory changes, which are coming thick and fast.
With updates to the law almost every year, regular reviewing of your processes can help you stay ahead of regulatory developments. It’s important to minimise the risk of non-compliance, otherwise, you can quickly lose your reputation. The pro-activity alone can often be noticed by investors and distributors.
Final Word
Assessing and demonstrating the value of your funds has always been important. By understanding and complying with the OFR, as well as effectively communicating with distributors, it’s possible to maximise the perceived value of your funds while minimising the likelihood of noncompliance. Most critical is recognising what is needed to meet regulatory requirements specific to overseas funds under the OFR, versus what UK distributors expect to see. The former alone may not be sufficient to satisfy the latter, which can lead to significant friction when trying to gain AUM from the vibrant UK funds market.