Even a novice investor has the wit to understand that you should buy
low, sell high. The problem lies in putting it into practice.
Identifying a low or a high is hard for both the inexperienced
amateur and the seasoned professional.
Arguably, fund managers should be well placed to look ahead but even
they cannot know for sure. The future remains a mystery to everyone.
Despite this obvious imperfection in the portfolio manager's skill
set, companies nevertheless seek to promote their funds with the
objective of encouraging people to invest today. To this end, not
surprisingly, they endeavour to present their funds in the best
As the track record of a fund demonstrates the talent (or luck) of
the investment company, this tends to be the feature brought to the
fore in their advertising, especially as it sells so well. However,
they obligingly remind investors, just in case they had forgotten,
that past performance is not necessarily a reflection of what may
happen in the future, et cetera.
At least, this was the way of the world until the regulator stepped
in. It opined that past performance, relative or absolute, reveals
nothing about what could happen in the future.
The industry could not believe its ears. Was the regulator really
suggesting that fund management was all a matter of chance, with no
differentiation based on the company's competence?
The regulator continued. Even the worst dogs can be made to resemble
supreme champions if you clip the dates to enhance the statistics,
judicious selection of a poor relative benchmark or a restricted peer
group improves the look of comparative performance and an historical
snapshot is less revealing than a well-researched biography.
On the last points, the industry had scarcely time to gasp: “Fair
cop, guv” before the FSA with breathtaking alacrity was threatening
to ban the use of all past performance in advertising – the very
information that investors and their advisers most commonly seek.
Yet a sense of balance has been restored and the noises emanating
from the regulator now suggest that efforts are to be made to
introduce some standards of best practice in advertising.
This is no bad thing, provided it is recognised that there will still
be the potential for restricted, albeit monitored, statistical
cherry-picking. Funds will still only be advertised when the
performance statistics look good.
Disappointing it may be but, while “buy low, sell high” makes
investment sense, the commercial reality of “promote high, sell more”
is what governs the marketing spend for most fund management groups.
Where FSA advertising standards will prove sensible is if they better
prepare consumers to compare fund performance on a like-for-like
basis, using the same benchmarks or the same time periods and the
same methodology for calculating returns.
How strange, though, that the FSA should be willing to consider
introducing such measures for performance advertising when for years
it has shirked responsibility on the publication of often inflated
Nothing motivates potential investors more than a high yield figure,
an issue that the regulator has consistently choosen to side-step.
Clear, fair and not misleading published information on yields would
be genuinely helpful to consumers.
The imposition of standards on the presentation of fund performance
information can only go so far. There will still be blind spots on
change of strategy, of fund manager and of ownership.
Buyers still need to do their homework before investing or, better
still, find someone competent to do it for them.
As ever, the FSA exists to protect consumers from industry error or
malfeasance, not their own ill-founded expectations. But the
regulator must also remain proportionate in imposing restrictions on
the industry and not impede or distort competition unnecessarily.
Let us hope that the FSA's past performance is not indicative of the
Anne McMeehan is a director of Cauldron Consulting