Fund past performance and fund share classes

Jason Baran – Insight Analyst (Investments)

The implementation of ‘clean’ share classes following the RDR update in 2012 meant that advisers could no longer be paid for their work in the form of commission and rebates from fund providers. This was done to increase transparency for clients, so they could more clearly see the cost they were paying for fund management, and the cost they were paying for the financial adviser’s advice.

However, a downside was that the calculation of historic performance became much more complicated. An investor wanted to see historic performance of a fund before investing, and be able to see this net of the fees they would likely be paying post RDR. This wasn’t possible as the new ‘clean’ share classes that didn’t pay any trail commission also didn’t have a long-term performance history available.

Meanwhile, the old share classes that included trail commission could not necessarily be used as commissions varied among providers. In addition to this, even with ‘clean’ share classes, fees vary depending on where the fund is bought, for example via a platform, directly from a provider or a provider’s internal distribution platform.

A fund provider could have a selection of fund share classes available pre-RDR for different clients and platforms. Typically, the fund provider would argue for the lowest-cost share class to be used so as to make net performance appear higher, even if these classes may not have been widely available.

So, it was unclear what exactly the historic performance of a fund was, depending on which share class was chosen. To adapt the often repeated disclaimer: past performance is no guide to past performance!

Required guidance from the Investment Association (IA)

At Defaqto we have had our own internal guidelines for some time, but have been pressing the IA (previously the Investment Management Association – the UK fund management industry association) – to clarify or publish guidelines on the matter. Given the IA is run by its members, that is fund managers, there is a wide range of interests involved and progress has taken longer than expected.

Fortunately, some progress has been made and the IA published guidelines on the matter in February (see full release).

To summarise, the primary share class for performance comparison is now chosen to be the highest charging (as measured by OCF or TER) share class that is freely available via third-party distributors. These share classes will be nominated by the providers, tested by the IA and then published on the IA website.

For pre-RDR performance, the IA has reiterated its previous view of using a pre-RDR bundled share class unadjusted for lowered fees post RDR. This may still create some confusion as to whether two pre-RDR share classes from different providers are truly comparable, given likely different rebate and commission levels. However, with the update from the IA, likely the best choice will be to pick the high OCF (or TER) share class from each provider in each case.