Don’t look back

As Compliance Monitor predicted back in July/August, the Financial Services Authority has turned its attention to the questionable but nigh-on ubiquitous practice of performance “cherry picking” in financial advertising. A new Task Force, under Christine Farnish, Director of Consumer Relations, will follow up on the controversial paper on the performance record of UK equity managed funds, “Past Imperfect?”, written by Mark Rhodes, which showed that there was, at best, an extremely weak connection between past and future performance and which drew anguished cries from the fund management industry.The FSA stated in June that it would not include past performance figures in its comparative tables. The remit of the Task Force will be to advise the regulator whose responsibility it is to ensure that advertisements are “fair, clear and not misleading.” It will focus on the use of past performance numbers and consider whether some form of standard approach may not be more acceptable. One of the problems has been that marketers in the investment firms have always been tempted to seek start and end dates that show fund returns to the best advantage. Even moving forward a single day when measuring a one, three or five year return can have major consequences for percentile rankings. Stripping out charges, including both the annual management fees and the broker costs, that are levied on the funds themselves but not obvious to investors, has been suggested as one means of levelling the playing field. Persistency statistics that measure the degree of repeat performance achieved in the past may also be considered. The Task Force expects to complete its research by next summer.