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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


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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