Advisers have urged managers not to use fund factsheets as just a “backside covering” exercise as questions remain over how effective new regulations will be in making fund information clearer and more useful.
Fund factsheets and other regulatory fund reporting tools such as key information documents have emerged as important material for advisers, but it is argued they are not used to their full potential.
As the deadline looms for Mifid II and Priips regulation, which will require providers to produce a new pre-sale KID, some advisers doubt this will result in the additional transparency on fund charges, performance and risks the regulation aims for.
Following our recent survey on fund due diligence, Money Marketing has asked advisers what they look for in fund factsheets, how useful KIDs are to them in their research, and what information they often struggle to get hold of.
Fund factsheets from asset management firms contain some brief information on fund performance, charges, assets and investment objectives.
But not all advisers find the data useful or clear enough to make informed decisions. In some cases, these marketing documents are not used at all.
Equilibrium partner Mike Deverell says he rarely uses fund factsheets as the information is often limited to performance statistics and “a bit of commentary”.
For instance, when reviewing a fund, the firm often asks fund managers for performance attribution statistics to separate their decisions from what is going on in the wider market.
Deverell uses Woodford Investment Management as an example. The boutique firm delivers its fund information in a bespoke way that provides that context as standard.
Equilibrium also asks for more details of the underlying portfolio than are usually on a fund factsheet.
Deverell says: “For example, if it’s a fixed interest fund we will want credit rating breakdown, yield to maturity of the underlying bonds, duration, etc. Most don’t have this.”
He says the TwentyFour Dynamic Bond fund is an example of a good fund factsheet as it contains most of the information he wants.
Advisers often complain not only that each providers’ information varies wildly, but up-to-date information around performance and asset breakdown is often missing.
Many advisers and individual investors have claimed that in some cases information found in one place directly contradicts the information feeds from the likes of fund research firms such as Morningstar and FE, for example.
Advisers say they frequently struggle to find useful data on property funds in particular, especially on cash balances, mix of property types, underlying rental yield, or lease length.
However, Deverell says Kames is “a rare exception” to this with its Property Income fund.
A recent Money Marketing survey on adviser fund due diligence shows half of the roughly 200 advisers rely on marketing material when doing fund research.
In the same survey, Money Marketing also asked whether advisers believed fund objectives on factsheets were clear enough. Nearly half said they were clear or neutral. However, around 10 per cent still said these documents do not report objectives in a clear manner.
Experts have often noted “long-term performance” is rarely defined in factsheets as well as by how much a fund says it will outperform a benchmark.
Capital Asset Management chief executive Alan Smith argues explaining the objectives and aims of a fund should not be a burdensome task, given the relatively limited investment scope.
He says: “In fund factsheets there’s always stuff about whether the fund uses derivatives or the like, but who really knows the implications of that? Saying ‘the fund may use financial contracts or instruments (derivatives) to manage risk, reduce costs or improve returns’ means as much to a client as something
random written in Chinese characters.
“Here is probably also a good place to explain tax consequences of reinvested income because clients need to know and none do.”
Overall, Smith argues fund documents have the potential to be useful but as they stand they are “pointless”. He says: “Providers, managers and advisers should easily be able to come up with a tailored portfolio factsheet with far better, more useful information than backside covering.”
A Priips solution?
Earlier this month, the FCA clarified which Priips products will fall under new disclosure rules and how charges, past performance and risks should be disclosed.
A table should include an entry and exit charge, an ongoing annual charge as a single figure as well as extra information on any charges taken under specific conditions as well as the reason and timing of any changes.
In addition to four performance scenarios, the KID will also require a “simulated performance” record for the period before data was available on the product for specific cases “provided that its use is fair, clear and not misleading”, the FCA says.
Fund factsheets follow less prescriptive rules than KIDs. FE regulatory consultant Mikkel Bates questions whether regulations should also impose some kind of prescription on the information fact sheets present.
He also notes advisers generally do not find the information they need to talk about with their clients, especially in Ucits Key Investor Information Documents which do not go into great detail.
Compared with Priips KIDs, the Ucits KIIDs, which were introduced in 2012, exclude portfolio transaction costs in their templates, for example. They also report on past performance only and not future scenarios like Priips KIDs.
However, Bates says advisers don’t need to show clients “a tabulation of risks of the fund” in their conversations.
He argues the Priips KID would be much more useful if advisers had to compare two or three funds on charges and performance, for example.
He adds: “In the future, it would be good that past and future performance scenarios prescribed by KIDs will be included in factsheets although the latter is often regarded as meaningless.”
But Thameside Financial Planning director Tom Kean agrees KIDS are “much less helpful” than fund factsheets.
He argues fund factsheets are much more interesting and useful to most people, but argues it mainly gives the fund manager scope to promote their fund rather than give “facts”.
He says: “I’d have preferred a prescribed section of the factsheet with the rest left over to the fund manager to give them scope to ‘sell’ their fund, then we’d only have one document to wrestle with.
“I’ve always liked Invesco’s fund factsheets, which show in great contrast the difference between the two documents.”
On risks reporting, Smith argues it is important fund factsheets and KIDs treat funds not as individual entities, but as components of a portfolio as a whole.
He says: “In any sensible investment strategy, it is the fund’s role within the portfolio that is important, not the fund’s ‘risk rating’ say. It’s perfectly plausible to add a ‘7’ rated fund to a portfolio and reduce the risk of that portfolio.
“Clients do buy individual funds, of course, but very rarely. But of course it’s asking a bit much for fund managers or providers to produce overall portfolio factsheets. Which makes them pointless and potentially misleading on many counts.”
Expert view: Transparency rules are set to be ignored
I doubt the current proposals from the Priips regulation for the KID will improve fund transparency and reporting for advisers as well as the end client.
The new proposals and their framework will be too long and detailed or too simplistic to mean anything, so I believe they will be ignored.
For fund factsheets, I would say the key things needed are clear objectives followed by the strategy for achieving those objectives, then setting targets, and showing the measures and timeframes.
This is necessary information so that people know whether to be pleased or disappointed and when to judge that.
Then the discussion on charges disclosure is the next key element to consider when comparing different funds.
Fund factsheets need clear cost disclosure of all costs, including estimated dealing costs and the amount of research that is being paid for within the commission total.
If you know what a fund is promising to do and how much you will pay for that you can make comparisons based on the promise, the price and the past performance. All this is simply the shorthand for all the manager due diligence you would expect.
Daniel Godfrey is co-founder of the People’s Trust