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Outside edge

CP121 has quite rightly occupied most newsprint but CP132, the presentation of past performance and bond yield funds in financial promotions, is also controversial.

I think the industry has played right into the hands of the FSA in asking for a slap on the wrists.

It has been farcical to have companies advertising top performance over 45 months and five days or promoting the relative merits of their European fund when the manager responsible for that performance walked out months ago.

Therefore, there are a number of points that should be welcomed and we all want to see more transparency in advertising, acknowledging that past performance on its own is not the only parameter to consider when selecting a fund.

There are a whole host of factors that need to be considered when purchasing a fund such as style of management, risk controls, size of the fund and topically whether or not the fund manager is still there!

The FSA&#39s comment that there should be separate disclosure on advertising bond funds showing both income and gross redemption yields is to be welcomed. I would like to see a standard method of calculating such yields, though.

However, it is not all good news. I would like to have seen the FSA issue more guidelines so that companies know exactly the parameters within which they can operate.

Surely the FSA could have chosen standardised periods such as three and five years, thereby creating a level playing field, and all companies would have to conform to these periods.

While making the risk warnings more prominent and pointing out that past performance is not necessarily a guide to the future, there is a very clear message from the FSA that past performance is not a factor to consider at all.

That is the bone of contention because the FSA has, of course, demonstrated this view in their own tables.

It is Draconian to suggest that past performance has no relevance to fund selection and like many FSA proposals, it is highly theoretical and simplistic but not practical.

Surely it matters that Anthony Bolton has produced superb performance figures for many years at Fidelity. The abysmal performance of most clearing bank funds year after year seems to add weight to the view that past performance has some relevance to the future.

I would like to have seen the FSA work closely with the industry bodies to look at the whole issue of past performance and its relevance. The FSA&#39s current approach will not result in the public being better informed.

This was an opportunity to examine the issues collectively and produce useful research and analysis. We tend to focus on the best-performing funds but I think there is compelling evidence that poor-performing funds often remain so until the fundamental problems are resolved, that is, dogs will always be dogs.

In conclusion, past performance has relevance when used in conjunction with other selection criteria. It looks as if, ultimately, rather like the tobacco industry, fund management and advertising will in future all be about brand awareness, which may discriminate against smaller investment houses.

Fortunately, the silver lining for IFAs is that the public will see through the facade that cost is the sole criteria for choosing a fund and seek advice.

This assumes that they can decipher at that stage whether their adviser is independent, authorised, multi-tied or some other derivative yet to be invented, which brings us back to CP121.

Michael Owen is joint managing director of the Plan Invest Group


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