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Priips rules on past performance likely to hit funds’ appeal


Eliminating past performance of funds in key documents for investors under the rules of Priips regulation risks causing a reduction in product demand and attractiveness, experts warn.

The European Commission is expected to sign off the draft rules of Priips this month which, among other changes, will see the end of the practice of including information on a fund’s past performance in key documents for investors.

Fund houses will be instead required to give guidance on how investment products are likely to perform in the future, based on three scenarios: unfavourable, moderate and favourable.

Independent regulatory consultant Richard Hobbs says banning the information on past performance could create a secondary market for people to get hold of that information but this will cause “deeper concerns” for the industry and consumers.

He says: “At the margin [banning past performance] will actually reduce demand for those investment products since it will increase the ‘search costs’ of the investor even if only measured in time: time itself is a precious commodity. Reducing demand is inherently bad for Europe.”

Brown Brother Harriman Fund Administration Services senior vice president Sean Tuffy adds: “The risk is that your product may look less attractive so managers are right to raise the issue. Past performance is not perfect a perfect indicator for investors and Priips’ opportunity is less perfect.”

Comments come as this week a group of eight fund houses, including Schroders and Axa Investment Management, have written to the European Commission asking to amend the draft rules or risk misleading investors.

The groups said the proposed rules are “not evidenced based, will not help consumers, and will not command respect”.

They asked Brussels to include past performance alongside future scenarios saying this historic data will “provide historic proof of an active manager’s ability (or not) to regularly outperform the fund’s benchmark”.

DLA Piper head of regulatory financial services Michael McKee also says moving from a focus on past performance to a focus on future performance assumptions will “unquestionably” be expensive for the industry.

He says: “It is correct to say that there has not really been an evidence-based analysis of whether it will significantly benefit retail investors.”

gbi2 managing director Graham Bentley says the three-scenario option being adopted is based on complex value at risk models that “may still mislead investors”.

He says: “The formula being used to model potential returns is based on past market volatility. This is intended to be fund group neutral. The confidence level being applied means the likely variance of actual returns from projected returns may be no different from that of past performance and future returns.

“The rules dictate the formula, but not how the scenarios are presented so the potential to confuse seems to me to be no less likely. Furthermore, there is no means of ascertaining the skill or lack of it of the manager from that data since it is market-focused.”

Experts, however, agree there is very little scope now to amend the new rules, with Priips to be implemented at the end of 2016.

Bentely says although past performance also has the potential to mislead “that tends to be a reflection of short manager tenure, fund size, closures and changes of objective”.

He says: “Funds with long histories under the same manager have performance data that is meaningful and significant. This is valuable information that a potential investor should see.”

The Financial Inclusion Centre co-founder and co-director Mick McAteer has also asked the European Commission multiple times to amend the rules but has not received a response yet.

He says: “Past performance should be used in the proper context but the removal will be detrimental for a good fund reporting.

“We don’t understand the logic behind it. It is more detrimental not including it as it is about accountability and transparency to investors.”


Platforum head of intermediary research Miranda Seath

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