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Investment Edge

After all the wrangling, the FSA has finalised its rules on the use of past performance data in advertising. I could never comprehend the argument that past performance should be outlawed in ads and the U-turn by the FSA is welcomed.

Anyone who has followed Fidelity&#39s special situations fund for the past 20 years would find it hard to believe that its outstanding track record has no bearing on potential performance.

It was ironic that one of the surveys used by the FSA demonstrated that, while top-performing funds do not necessarily repeat their success, poor funds remain poor.

Losers remaining losers is a familiar concept to me as a follower of Manchester City. Therefore, perhaps not necessarily in the way we might expect, past performance does seem to have a bearing on future performance although I accept that this is only one of the parameters we should use when selecting a fund.

If we asked the public to list their key criteria, they would go for performance first, followed by charges, investment sector and then brand. As an IFA and not a member of a direct-mailing company, I would select first a combination of past performance linked to an analysis of style, risk, and management. I would look at charges but brand would not be an issue.

In the last 20 years of advising clients, I have rarely been asked to justify who company XYZ actually are and, let&#39s face it, many unit trust companies are not household names.

I agree with the FSA that its new rules will prevent firms from cherrypicking data to present their past performance in a flattering light. We have all come across crazy advertising campaigns over the years and this is a laudable principle. I also agree with the FSA&#39s proposals for standardised data using discrete annual returns for the previous five years and precluding using past performance for funds which have data available for less than 12 months.

The proposal to improve the balance in ads by reducing the emphasis on past performance is interesting. The marketing spin doctors will now presumably give more weight to other areas rather than just past performance. It will be interesting to see ads trying to stress the advantages of a team-based approach or a superb set of analysts – concepts that are not easily understood by the public.

One would expect the bigger groups to plug their advantages of size but companies may also start to look at what their brand means to the public.

As an investment IFA, I am sceptical of the role that brands actually play in fund selection but I acknowledge that there is a big market in direct selling and discount broking.

The dumbing-down of past performance may see a trend towards the public ignoring these prescribed tables and looking at issues such as investment process, size, stability of fund managers and so on.

The proposals then present a challenge to marketing departments to think how their ads can set the company apart from others when past performance can no longer carry the same weight.

It should be an outstanding opportunity for investment-focused IFAs to help the public in their bewildering choice. The public are not going to learn about the style of the fund or the investment processes involved simply from an ad. Has the fund manager recently left?

An IFA can add real value but I would really like to see the FSA guide the public towards the IFA sector.

Finally, these rules are only applicable to collective investment schemes and I look forward to the day when the net is widened. It would make interesting reading to see banks and building societies advertising their interest rates over the previous five years.

Likewise, we could have tables showing the APRs that credit card companies have charged over the last five years. Now that is what I call a level playing field.

Mike Owen is joint managing director of Plan Invest


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