Regulators in New Zealand have warned fund managers to avoid advertising eye-watering 12-month returns caused by COVID-19.
The Financial Markets Authority (FMA) is also finalising draft rules telling the sector information cannot be “cherry picked” to create a more favourable impression.
The warning came to counter advertising hyped returns without highlighting the sweeping sell-off at the beginning of the pandemic, during February and March 2020.
Some phenomenal returns for many funds, particularly those with large exposures to equities could fool investors, the FMA said.
“The FMA is concerned investors being marketed returns for the 12-month period through social media, websites and other channels, without context, may be misled into thinking they are typical market performance or that particular managers have significant, repeatable skill.”
Warnings against too good to be true returns on social media have also been posted in the UK.
FMA Director of Investment Management Paul 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.
As part of the warning, the FMA has asked KiwiSaver providers, other fund managers and financial advisers to avoid advertising performance for the 12-month period to 31 March 2021. Where promotion has already happened, it should be withdrawn.
Mr Gregory said the FMA would closely monitor providers promoting the strong returns seen over the 12 months to March 31.
“We will be closely monitoring whether doing so potentially breaches the fair dealing provisions contained in the Financial Markets Conduct Act 2013,” he added.
“We will also be concerned for the interests of any members who joined the provider’s scheme or switched into higher-risk funds during the promotion period.
“Encouragingly, some fund managers with growth products share our concerns and have already told us they will not be promoting performance focused exclusively over this 12-month period.”
FINSIA New Zealand National Council member Leon Grandy – Chartered Banker SF FIN – who is MD of Armillary Ltd – congratulated the FMA’s proactive approach ‘in regards to the probative versus the prejudicial impact of reporting absolute returns based on periods where markets had been dramatically impacted by COVID concerns.
“Reporting returns without reporting risk is a nonsense,” he said
“We compare and contrast the funds performance against other benchmarks so that investors can get a sense of volatility of the fund.”
Mint Asset Management Head of Sales and Marketing David Boyle said: “I totally agree with the sentiment of the FMA’s intentions around advertising returns.
“Some of the numbers were quite eye watering (almost too good to be true) and prospective investors who saw those returns without any explanation why they were so high, could have chased those returns not really understanding the underlying risks that might impact their investment.
“However, the issue I see going forward is how should managers look to promote returns in the future.
“This is where the Funds Management industry and the FMA need to sit down and provide further guidance that meets our regulatory obligations, while also allowing fund managers to show their performance in a meaningful way.”
Sam Stubbs, Managing Director, Simplicity (NZ) said: “The FMA’s response was entirely appropriate in this situation and wasn’t overbearing. It was aggressive advertising of short term returns for a long term investment, with very little likelihood of repeating itself.”
In fact, the FMA has published draft consultation on advertising – soon to be finalised – which expects fund managers not to over emphasise performance at the expense of other material information.
Past performance information cannot be “cherry picked” to create a more favourable impression, it says.
Market index performance for 1 April 2020 to 31 March 2021 – the 12-month period in question – shows returns of 53.17% for the S&P 500 (USD).
Rewinding the performance timescale to the 12 months from 1 March 2020 to 28 February 2021 produces returns of less than half that – at 23.92%.
It is a similar picture from the NZX50 (NZD) statistics showing returns of 23.94% against 7.7%.