fund groups blocked from falsifying perf figs

Morningstar has taken the lead on resolving another ‘unintended consequence’ of RDR, one that you may or may not have considered.

fund groups blocked from falsifying perf figs


Following months of discussion and debate the global investment data provider has come up with a proposal on the treatment of funds’ performance history in an era of share class ‘alphabet soup’.

“When it is finally in place this coming January, the retail distribution review should be welcomed, not least for providing much needed transparency with respect to the real costs of fund management and financial advice,” says Andy Pettit, director of data and research strategy, global funds, Morningstar UK.

“While these and the RDR’s many other beneficial changes are well documented, the very real challenge of how the industry will present historical fund performance going forward has received less attention,” he continues.

The problem he identifies is the co-existence of pre-RDR (commission-loaded) and post-RDR (commission-free) share classes for an indefinite period of time, which creates a conundrum in finding a way to present historical performance that is both systematic and consistent across the fund universe.

Straw poll

To address this Morningstar brought together 65 industry representatives in September of this year, a convention that only served to illustrate that opinion on the issue was divided.

“For investors to fully benefit from the forthcoming regulatory changes an industry-wide consensus on the handling of performance history is urgently needed. If parties take different views, inconsistent presentation of performance among fund houses and data providers may cause needless confusion.”

One of the only certainties about financial services is that Jo Public finds the sector generally confusing. That could be due in part to people’s own failings to confront financial realities that face them (take a look at the latest research from BlackRock on consumer’s savings habits for more on that) but it also the fault of the industry in many cases for shrouding everything in jargon.

Share classes A-Z are just the latest manifestation of this.

For the fund groups I’m sure it would be preferable to shift everything from pre-RDR bundled share classes into RDR-ready clean fee share classes. But that cannot be done while legacy commission still exists, and as it stands the FSA is allowing for legacy commission to make sure investors are not inappropriately transferred out of collectives.

This presents two methods to fund groups and data providers when it comes to presenting past performance: adjusted and unadjusted.

  • Adjusted – Restating the track record of the older share class to reflect the performance that would have been achieved had the fees applicable to the new class been available throughout.
  • Unadjusted – Making no adjustment for the differences in fees between the old and new classes.

For its part, Morningstar has chosen to follow the unadjusted method even though at the forum it held in September the 65 industry participants voted with a “marginal bias” toward adopting the adjusted approach.

Devious fund groups

The attitude of this group is worrying because with an adjusted approach data providers would be altering the truth and changing the past performance a typical retail investor could have achieved had they held the fund during that time.

This adds fuel to the claim fund groups would prefer to present any graph which shows them in a good light rather than focus on a true representation of what they have achieved.

“There is a danger of overstating the performance that the RDR share class might have achieved had it existed,” Morningstar says, and this is not something that should be taken lightly.

A huge motive behind the implementation of RDR is to increase transparency for investors. So making up past performance based on what could have been will not help to serve this cause.

By taking the unadjusted route and presenting the facts as they are, Morningstar says it will avoid suggestion the industry has served investors better in the past than was, in fact, the case.

Let’s hope the rest of the industry follows suit.


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