Fund managers warned against misleading investors
The Financial Markets Authority is warning fund managers against potentially misleading investors over phenomenal annual investment returns on their investments.
FMA investment management director Paul Gregory said fund managers should avoid advertising large investment returns for the year to March 31, a period that included none of the massive Covid-19 related sell-off in February and March last year, but included all of the recovery that followed.
Focusing on the recovery alone gave the appearance of ‘‘phenomenal returns for many funds, particularly those with large exposures to equities’’, Gregory said.
The authority was concerned that without context, investors being marketed returns for the period through social media, websites and other channels, could be misled into thinking they were typical of market performance or that particular managers had significant, repeatable skill, he said.
For example, for the year to March 31 the NZX 50 index gained 23.94 per cent in value.
However, for the year to February 28, the NZX 50 rose just 7.7 per cent.
Gregory said the watchdog would be monitoring potential breaches of the fair dealing provisions of the Financial Markets Conduct Act.
‘‘We saw some marketing and advertisements that went very large on big returns for the 12 months ending March 31. We thought there was a risk, particularly given what was reported in those returns and what isn’t captured in those returns which meant we thought investors could be misled,’’ he said.
The authority decided to act quickly and issue a warning so that other fund managers did not start advertising the big results without any context to why the fund had performed so strongly, he said.
The authority was also concerned for the interests of any members who joined a scheme, or switched into higher-risk funds during the promotion period, Gregory said.
‘‘For investors, the strong performance over the past year is not a reason to chase performance. Rather, it shows the value to investors of staying the course through market ups and downs with the manager and product you have, provided you’ve chosen the right fund for your risk needs and tolerance.’’
Gregory said it was encouraging that some fund managers shared the authority’s concerns.
The authority has published draft consultation on advertising which expects fund managers not to overemphasise performance at the expense of other material information and that past performance information could not be ‘‘cherrypicked’’ to create a more favourable impression, he said.
‘‘For investors, the strong performance over the past year is not a reason to chase performance.’’
Paul Gregory
FMA investment management director