Analysis & findings
In this section we explain what we analysed, how, and the conclusions we reached. See the full PDF report (Click here) for further detail on the individual funds and the steps we intend to take to redress any problems identified.
PERFORMANCE
This is not just about the absolute amount of money gained or lost. Instead this assessment looks at whether the fund performed as expected. Did it meet its objective(s)? If it didn’t, why not?
For instance, if a fund seeks to achieve capital growth over a set time period, we looked deeper to see what happened over that period and why. We used data from external consultants to provide independent peer analysis to help with this relative assessment. In cases where a fund has multiple objectives and was found to have partially met these, an amber rating was given while red would have been used for any failing all objectives.
In measuring the returns achieved, where possible we used the funds’ primary share class, W. This is BNY MIF’s ‘platform’ share class and does not feature on-going commission payments to advisers. Other share classes have been used when either a W share class does not exist or a W share class has insufficient history.
Unless otherwise described in a fund’s objective, total return performance was measured in this section, gross of annual management charges. (Costs were analysed separately). All time periods examined ended 30 June 2020 or as at with respect to yield.
PERFORMANCE FINDINGS
Although all funds met some of their performance objectives, six were found to have only met some of their stated targets. No fund was given a red rating in this category.
In looking at the returns, the board did take into account the volatile end of the review period. Market falls in March 2020 were steep. In that month, the longest-running S&P 500 bull market (when prices increase) in history came to an end. At 22 days, it was also one of the fastest ever falls into a bear market (when prices fall by 20% or more) for the index.2
However, many of the funds examined had longer term objectives, some of which included rolling time frames. Managers of funds found to be failing on some of their performance objectives were asked for an explanation.
The board also sought insight into any plans the manager had to get the fund back on track to meeting all of its performance objectives. The board will continue to monitor these funds closely to see if the shortfalls experienced have been rectified. In one case the objective of the fund itself is now under review.
The six funds with amber scores for performance were:
(Click on the fund name for more details as to this assessment)
2 CNBC. This was the fastest 30% sell-off ever, exceeding the pace of declines during the Great Depression. 23 March 2020.
QUALITY OF SERVICE
As the board governing these funds, we are ultimately responsible for the service provided to the funds and to investors within them.
All of the services examined in this measurement are shared resources. For instance, all the funds use the same third party service providers such as: fund accountant, transfer agent, auditor and custodian.
This means assessments in this category are much more uniform.
Data from around a dozen different sources helped us to arrive at our conclusions.
These included:
Errors and issues logs from across the different service providers
Client complaints log
Client survey
Website data
Direct client feedback
We looked at data that applied to all funds as well as those that gave us a more individual picture.
For instance, we examined BNYM IM’s annual investor survey, which applies to the entire fund range.
At the same time we looked at the complaints received over the past year and client feedback for any fund specific comments.
QUALITY OF SERVICE FINDINGS
We have rated all funds green on this metric. There were no key areas for concern raised in any of the reports or information reviewed. Overall, we have strong relationships with our third party service providers. While we believe there are always areas that can be improved upon, such as response times, we did not identify any major issues or cause for concern.
The results of BNYM IM’s annual investor survey3 suggest above average service on many criteria, including fair and transparent charges and good and clear communication.
BNYM IM is strongly felt to be a reliable company (93%), providing good customer service (82%) and is considered easy to do business with (79%). The main reasons for dissatisfaction were cited as being falling returns and the need for greater communication and we are looking at ways to improve on both these measurements.
As noted earlier in this report, we did substantially increase our communication amid the Covid market falls. At the same time we have worked to improve our overall communication style by using more plain English in our letters to shareholders.
FAIR TREATMENT OF INVESTORS
This component in our assessment includes the FCA’s economies of scale criteria. In theory this means the larger a fund is, the better able it should be to reduce its costs and pass on that saving to its investors. There was much discussion by the board on this component of the value for money assessment as there are many ways to define and deliver economies of scale.
For instance, using the collective buying power of our funds, BNY Mellon Fund Managers has negotiated competitive pricing with service providers. One way in which we have passed on these benefits is by moving more investors to our B shares, a project that was completed in July.
In our B shares, the cost of many additional expenses – excluding custody – is set at 8p for every £100 invested (or 0.08%). In our legacy retail share classes, these costs are 10p (0.1%) for every £100 invested.
3 This annual survey of BNYM IM’s direct retail investor base has taken place since 2013. It involved 250 telephone interviews with investors in June 2020.
Where service fees are more fund specific, such as for custody, we can also manually cap those costs to adjust for a fund’s unique circumstances, when needed.
Within our analysis, where we focused on weighing up on-going charges versus the size of the individual funds over the past year, we examined whether such a cap on fees was in place, or if it should be, as a way to protect investors in smaller funds.
Another way we have applied economies of scale is by absorbing the rising costs of doing business that has resulted from increased financial regulations (especially since the 2008 financial crisis).
Classes in units/shares is another part of the FCA’s criteria we believe comes under the fair treatment of investors. For this analysis we looked to see if our retail investors were in the lowest fee share class available to them.
FAIR TREATMENT OF INVESTORS FINDINGS
We have rated all funds in this category as green. However, while we are comfortable with the methodology we have used to assess these funds in 2020, we think we can do more.
In our evaluation we found the growing size of the funds commensurate with its costs to be acceptable. Whether the costs were too high on an absolute basis was a question to be answered within the cost analysis part of this review.
We did identify a few small funds where we think it would be appropriate to implement a cap on expenses for the benefit of its investors. This is something not every fund provider can offer but we see it as another way in which we can pass on economies of scale for investors’ benefit.
Going forward, we are establishing a more systematic monitoring mechanism to identify the necessity of any such caps before costs increase for investors.
With respect to investors being in the right share class, we initiated a project to move shareholders from the legacy retail sterling share class (A shares) into the more contemporary B retail shares (which do not contain adviser commissions).
We have been actively encouraging retail investors to switch to the lower-priced B shares, which have been available for some time as part of our online InvestorZone offering. However, despite this encouragement not everyone eligible for the lower cost shares signed up to the InvestorZone portal. As such, in 2020 a project to convert all direct retail investors in the sterling income and accumulation shares (legacy retail) over to corresponding B shares was started.
By 4 July 2020, £339m – held across 21,858 share holdings – were moved to the lower fee paying B share class. This resulted in a reduced annual fee for more than 15,000 clients.
COST
There are three components to the FCA’s cost criteria, which we amalgamated into a single unified rating – where possible. Much like other categories, there are many ways to assess costs.
We tried to avoid a generic approach, taking each fund on its own unique merits. And while a relatively high fee can be a drag on returns, as the FCA agreed, costs shouldn’t be examined in isolation.
Costs need to be looked at versus competitors doing the same thing and in relation to the outcome. As such, if the absolute performance of an apparently expensive fund was not adequate to justify the cost incurred, we were more circumspect in its rating.
We also examined how our funds stack up in comparison to similar funds on offer from different providers. We also looked at how the fees charged differ for retail investors, who typically invest a small amount and those for institutional investors, who typically invest large sums thereby commanding a lower fee.
The preliminary review stage examined our retail (B) and bundled (A) share classes. (See earlier in this report for the share class definitions).
The board then examined additional share classes on these funds – particularly W (platform share class) and Institutional. These normally feature lower ongoing charges (OCF) owing to the larger minimum investment thresholds they feature.
If, based on these assessments, a fund was flagged as deserving of an amber or red rating, we dug a bit deeper. We looked at the reasons why there might be added expenses – was it because the fund was too small? Or was it because it had comparatively higher expenses such as custody costs due to the markets in which it trades.
Using this information as well as composition of the investor base for each fund undergoing additional review, in some instances awarded with split ratings – one representing retail and one, institutional.
COST FINDINGS
Across the eligible fund range, we found six funds failed to meet the entirety of our value criteria in this category.
Of these six funds, the board felt four should have split cost ratings based on the separate value present in the direct to retail versus institutional or platform share classes. In the main, the funds with split ratings were singled out as their investor make-up was predominantly institutional and/or platform shares. We didn’t think it was fair to ignore the costs that were found to offer good value, relative to peers, for the vast majority of the funds’ investors. In fact all four were awarded green ratings in their institutional and platform share classes.
We will analyse the costs on these funds, including operating expenses and annual charges, with the aim to reduce them where possible. In cases where we cannot reduce the fees, we may look to close or merge small funds if we believe it to be in the best interest of investors.
However, in some cases the costs for the retail share classes were also significantly higher than similar funds.
As such, despite the partial green scores in these funds, action will still be taken on the weaker retail rating. Redress in this area is based on the individual fund and will involve implementing caps on expenses, where possible, or reducing the annual charges on select share classes.
Click on the fund names for details of their individual assessment and corrective actions.
OVERALL SCORING
Given the funds in this range are so varied, the board wanted to avoid any “one-size-fits-all” methodology. Instead, following analysis in each of the four broad categories and ratings given within these areas, the board re-assessed all funds receiving any score below green.
At this stage, the board looked to understand the reason behind any relative issues, how long they have existed and any steps that may have already been taken to correct such hurdles.
Similarly, further interrogation of the data was taken. On funds deserving of a red rating on the retail share class but amber or green on the institutional share class, the weight of the fund’s shareholder base helped to determine the final score.
For instance, in order for the board to lean towards the institutional share class rating, ownership had to be more than just a simple majority. The depth of both the cost discrepancy between the share classes and departure from performance objectives as well as the length of the latter were also considerations for the final scores.
IMPORTANT INFORMATION This is not a financial promotion. BNY Mellon Fund Managers Limited is authorised and regulated by the Financial Conduct Authority. A member of the Investment Association. BNY Mellon Fund Managers Limited is registered in England No: 1998251. A subsidiary of BNY Mellon Investment Management EMEA Limited. Registered office: BNY Mellon Fund Managers Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA