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Widows takes another bite of Morillo cherry

Indignation at Scottish Widows Investment Partnership&#39s continuing boasts about the performance of its European fund nine months after the departure of star fund manager Albert Morillo shows the issue of past performance is still alive and kicking.

The FSA stated in its recent report on past performance that: “Retail investors cannot increase their chance of choosing a fund that will perform well in the future by picking one that has performed well in the past.”

But that has not stopped Swip boasting in its advertising that £7,000 invested in the European fund in February 1986 would now be worth £85,190. Industry commentators point out that, since Fiona McRae took over managing the fund, it has not performed well.

Hargreaves Lansdown head of research Mark Dampier says: “The Swip advertisement is highly misleading. The past performance is Albert Morillo&#39s, not Swip&#39s. You should be able to promote that a fund has done well but there should be a caveat to say the management has changed.”

Yet there are many investment companies that would disagree with the FSA&#39s assertion that past performance is not a guide to the future.

Threadneedle communications director Richard Eats says: “You can learn from past performance. The volatility of a fund is relevant when selecting it.

“There is no direct causal link between past performance and future performance. Past performance may be the result of judgement, luck or risk. But it isn&#39t irrelevant although you have to understand what the data might tell you.”

Aberdeen Asset Management unit trust managing director Gary Marshall says: “It is a nonsense to suggest past performance has no relevance. The fund might not have underperformed, it may well have been a move in the whole sector, so past performance is distorted.”

Yet if the industry is continuing to advertise the success of its funds, why was it unable to convince the FSA when it was challenged to prove the validity of past performance?

Forsyth Partners marketing director Richard Newell says: “It is hard to believe the industry could not come up with a credible argument for past performance but fund managers had blotted their copybook with their advertisements in the Isa season and the FSA lost patience with the way they abuse the system.”

Fund managers have been criticised for manipulating past performance figures by carefully choosing time periods to improve the look of their funds.

Newell says: “Fund groups need to be kept in line. They do abuse the system but changes to the rules should not make it harder for advisers to do their jobs.”

Autif spokeswoman Clare Arber says: “There may be a cause to look at advertising. We agree past performance on its own is not a useful measure but when used with other pointers it can be useful. There are many things to consider when buying a fund.”

To prevent the distortion of figures to show off a fund to its best advantage, calls are being made for a fund&#39s volatility to be charted over a yearly period against a benchmark or for comparisons to be made within sectors.

The FSA had intended to make comparison of funds simpler for the consumer to understand but there is scepticism that such a test could be found. Ultimately, there is no guarantee of a secure investment.

Marshall claims: “Using other methods will still mean distortions, just different ones. Everyone goes close to the edge whatever the rules are, everyone gets as close to breaking them as they can.”

The challenge for advisers is to ensure past performance is used carefully.

Dampier says: “Past performance should not be the sole decider when choosing a fund. It is a tool to help you make a decision. We look at the past performance of the fund manager, their CV and history and their style of management. Most funds underperform because the market has moved away from the style of management.”

In the instance of the Swip ad, a well-read intermediary would be aware of the change of management and make recommendations accordingly.

Eats says: “The experienced IFA will ask the client certain questions about the port-folio they want rather than just sticking it in the top-performing fund. He will try to find the right spread of products for the individual.”

But it appears the industry and the public alike will take a lot of convincing that past performance is not a useful guide.

Chase de Vere investment adviser Justin Modray says: “The public will invariably keep buying on past performance alone, which is worrying because people end up in funds that are not suitable for them. Advisers have to get across the message of their independence to their clients and give sound reasons for recommending a fund.”


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