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Revealing the top performers

A number of possible developments relating to investment performance could


have an impact on the operation of stakeholder pensions and they do not


appear to be complementary. In fact, they are difficult to reconcile.


The first is the FSA&#39s consultation paper 28, Comparative Information for


Financial Services, in which the FSA proposes that league tables showing


past investment perfor- mance should not be included in information


presented to consumers when they are considering taking out financial


products such as a pension plan.


However, other information under the heading of comparative information


should be given such as charges, product features, service standards and


financial strength. The FSA will announce its decisions on league tables in


the next couple of months.


Another FSA publication, occasional paper series 6, The Price of Retail


Investing in the UK, by Kevin James, goes further than the previous FSA


paper, arguing that, ultimately, price has a greater impact on returns than


actual performance.


Consumers choose products on past performance, not price. If managers


reach the top of the league tables on performance, they attract a large


amount of business but at that point they can milk existing customers with


high charges because consumers tend not to switch to different funds. He


concludes consumers would be better opting for low-charging funds such as


trackers.


However, a properly designed past performance indicator can provide


information which will help consumers and IFAs to shop around more


effectively, make better informed decisions and encourage a more


competitive market.


It is true that consumers cannot use past performance data to predict


future performance but that is not to say investment performance is


completely random. Firms that attract and retain the best fund managers are


more likely to produce better investment returns than firms which do not.


In a competitive market, where past performance is widely publicised,


firms near the bottom of the pile are under the greatest pressure to


attract the best fund managers.


The fact that it is hard to predict which companies will have the best


relative fund performance is evidence that market competition drives up the


quality of investment management, with the worst performers having to


strive hardest to improve.


Undoubtedly, excessive emphasis on outstanding investment performance, or


on any other indicator, can lead to consumers making the wrong choices.


However, consumers will be unable to make decisions if comparative


information is withheld from them. Rather, they should be able to obtain


authoritative information on past performance which they can compare with


information which they see in advertisements, such as a list of comparable


funds from different companies showing relative perfor- mance over


five-year periods for the last 20 years.


Consumers looking at this information as a guide, say, to the worst and


best companies would soon realise the unreliability of raw past performance


data as an indicator of future performance.


IFAs, however, would be able to provide convincing qualitative analyses of


particular funds when making recommendations to clients. Their advice


covers far more than choosing a fund which is likely to produce the biggest


payout. It involves weighing up a client&#39s needs and objectives and


assessing their attitude to risk.


More encouragingly, the Government has just published draft regulations


for stakeholder pensions covering its requirements from April 2002 on


investment. Schemes will be expected to report annually to each member on


the investment performance of their fund, relative to a common benchmark.


The proposed benchmark will be based on the investment growth recorded by


all stakeholder schemes in their default investment options.


In time, these benchmarks will inevitably affect the attitudes of scheme


members on whether to continue with their existing stakeholder provider or


to transfer their fund to a new provider. Past performance relative to the


benchmark will drive the behaviour of members, scheme trustees and


investment managers.


Past performance is a popular indicator among consumers. The regulators


should take the opportunity to present it in a useful and responsible way.


This is the difference between educating consumers and dictating to them.

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