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Inside Edge – Daniel Godfrey

Can investment managers be trusted to provide a true and fair view of

their past performance record and the bearing that it may have on the


Based on past performance, the answer would appear to be no.

While there is no reason why a commercial organisation should not be

allowed to put its best foot forwards, it should not be allowed to

exploit the information gap between itself and consumers to create a

false impression.

The industry has engaged in a number of unacceptable tricks over the

years, such as:

•The use of selective start and finish dates.

•The use of quartile positions when it suits. From a distance, a

poster that lists four funds and has numbers beside them saying 1st,

1st, 1st and 4th looks much better than is really the case.

•The use of offer-to-offer prices.

•The practice of merging a poorly performing fund with a good

performer and subsequent attempt to use the past performance record

of the good one.

•The use of performance comparison tables using only selected competitors.

On the evidence, there is a case for the FSA to take a strong grip

over the way in which advertisers use past performance data in their


But it was wrong to take the view that there is no place for past

performance in advertising and it is to the FSA&#39s credit that it now

recognises this reality.

Although good past performance persists as a predictor of future

outperformance only weakly, it does persist in rare cases. This is

reason enough to allow fund managers to set out their wares in a

sensible manner.

In my experience over the last 20 years, it seems to me that

performance is mainly down to luck for most fund managers. Most have

a good year, a decent year and a poor year on average in a three-year


Sometimes their style hits lucky and they get two good years in a

row. Very rarely will a manager shoot the lights out three years

running and that will ensure them a good career for at least the next

five years.

Even if they then revert back to one good year in three, they will

probably be able to survive on the reputation built in the three good

years. They will be considered stars. But true stars deliver over

such long periods that you just cannot put it down to luck.

Unfortunately, you do not get many Anthony Boltons or John Waltons

per generation. Of course, that manager who has had three good years

may indeed be a true star in the making, just as he or she may be a

three-hit wonder. We just won&#39t be able to tell for a good few years


So, what could the FSA do to control the use of performance in

advertising to ensure that it is fair and not misleading?

•Mandate advertisers to quote over set periods of past

performance or since launch if earlier.

•Ensure that they show discrete years as well as cumulative so

that people can see if great five-year performance is largely due to

one fantastic and probably unrepeatable year.

•Force them to repeat either position, quartile or decile

rankings for all time periods shown, not just one of their choosing.

•Mandate a link to a website such as Trustnet with a dedicated

page to more detailed information and explanations.

•Ensure that there is an equally prominent description of the

manager&#39s investment process, style, corporate stability and manager


There is no reason why investment managers should not be allowed to

use their past performance as a marketing tool but a sensible FSA

regime would ensure that they are not able to dress up mutton as lamb.

Daniel Godfrey is director general of the AITC


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