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Outside Edge – Anne McMeehan

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&#39s 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

possible light.

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&#39s 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&#39s past performance is not indicative of the

regulatory future.

Anne McMeehan is a director of Cauldron Consulting


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