Investing is too important to be run by KIDs
WE NEED a new kid on the block. As a matter of urgency. No, I am not calling for a revival of Boston boy-band New Kids On The Block that entertained many of us in the late 1980s with Hangin’ Tough and those memorable opening lyrics ‘Oh, oh, oh, oh, oh’ – four times over.
I am talking about the new Key Information Document (KID) that all investment companies must now make available to investors – or wannabe investors – for each fund or trust they manage. As it stands it is wickedly misleading. Oh yes, oh yes.
In light of a scathing report published earlier this month by the Association of Investment Companies – provocatively entitled Burn Before Reading and one I reported on at the time – I have taken a close look at some of these key information documents.
Reading them, you would think that provided the winds are blowing in the right direction, investing is a licence to make easy money. It isn’t. Oh dear, oh dear.
Let me give you two examples. At some 150 years old, Foreign & Colonial is the country’s oldest investment trust. It is a brute of a fund with assets of £4 billion and a portfolio spread across the globe. Although manager Paul Niven may not like me for saying this, the trust is a steady eddy, delivering a reliable mix of long-term capital growth and a gently rising dividend. Ideal for long-term investors who like an income – to reinvest or take as they please.
But reading its key investment document, you would think it is a high-risk, high-reward fund you have a more than even chance of making serious investment gains from. Akin to a technology fund that promised a lot in the late 1990s, only to implode when the technology stock market bubble burst in spectacular fashion in early 2000.
The rules on KIDs, overseen by the Financial Conduct Authority but originating from Europe, require F&C to give an indication of what returns investors could get under four future stock market scenarios – stressed, unfavourable, moderate and favourable.
Although the stressed scenario does indeed warn F&C investors that they could lose money on a £10,000 investment over five years – £5,331, or 14.1 per cent a year – it is the numbers that spill out from the moderate and favourable situations that are somewhat unbelievable.
A 23.8 per cent annual gain every year for five years, turning £10,000 into £29,049, if all turns out favourable. Fantasy world. A 14.7 per cent annual return in moderate conditions, transforming £10,000 into £19,879.
The equivalent numbers for Scottish Mortgage, an £8 billion trust and a component of the FTSE 100 Index, are even more implausible. If market conditions are favourable over the next five years, investors could enjoy annual returns of nearly 40 per cent, turning an original investment of £10,000 into £53,192.
Even if the next five years are dominated by moderation, Scottish Mortgage’s document is telling investors they could receive annual returns in excess of 25 per cent. Really? Come on.
These documents are dangerously misleading. Indeed, if any of these exaggerated future performance numbers were ever used in adverts issued by investment managers, the companies would be rightly accused of misleading investors. A blatant case of mis-selling – of exaggerating the potential for investors to make money from their initial investment. How have we arrived at such an unsatisfactory state of affairs? In attempting to devise a document that helps investors understand the funds they are buying (or hold), the regulator has achieved the complete opposite. The computer programme it has built to estimate future performance is flawed because its objective is an impossible one to achieve – like landing a man on Jupiter.
Indeed, the figures it punches out for investment funds are primarily based on evidence from the past. Numbers that for years investment managers have had to warn investors against with the following line: ‘Past performance is no guide to the future’. Who requested them to do this? Yes, the regulator of course.
Getting a watchdog to admit it has got something seriously wrong is as unlikely as Scottish Mortgage turning £10,000 into north of £53,000 in five years’ time. But we need a new KID on the block pretty damned fast, even if it is one stripped bare of pie in the sky forecasts. Oh yes, oh yes.
The numbers that spill out for a ‘moderate’ stock market scenario are unbelievable