Saturday, February 20, 2010

Frank Newman: Time for mandatory disclosure of fund managers

Questions regarding the way Huljich Wealth Management has been reporting historical investment returns raises some wider issues about the way fund manager performance is reported. If investors are to be better informed as the current government expects, then a good starting point would be to ensure all fund managers are reporting returns in a consistent manner, as there is none at present.

Some fund managers are refusing to provide monitoring companies like Morningstar with information, some are comparing their performance against inappropriate benchmarks, and others leave out important information such as their management expense ratio (MER) when it suits them to do so.

That’s a pretty poor show and something the new governing body to emerge out of the proposed restructure by the government should address if it is to start to improve investor confidence in the funds management industry. Perhaps
its time to mandate a reporting regime that:

• Prescribes a performance calculation and reporting methodology.

• Includes risk adjusted returns, such as return per unit of risk.

• Has full disclosure of all transactions to prevent fund managers conveniently omitting to mention loss making trades, or trades with associated interest.

• Requires disclosure of the management expense ratio (ie total fees pad to the manager as a percentage of the funds under management).

• Requires regulatory approval when using a comparative benchmark to measure performance or calculate a fund manager’s performance fee.

Once investors receive full and consistent performance reporting they will be in a position to judge whether a fund manager is in fact any more skilled than a mystic reading tea leaves or the random stock pickings of a chimpanzee.

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