Comparing past fund performance is getting trickier

John Kenchington

The world of fund performance is about to get topsy-turvy.

Currently when you look at the way a fund has performed, what you see is what you got. Fund performance is simple: compare the unit price at one point in the past to the unit price today.

Obviously this ignores any initial fees, unit trust price spreads or dilution levies suffered by individual investors, but crucially funds’ net returns can still be compared like-for-like using this simple method.

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However, all that is about to change.

In the past, retail investors tended to be placed in funds’ commission-inclusive share classes. These charged higher fees in order to rebate money back to advisers and platforms, weighing on performance.

Today, thanks to the RDR, investors are now placed in ‘clean’ rebate-free share classes.

But most of these clean share classes were launched recently, to comply with the RDR. So if the data providers start defaulting to publishing clean-share returns, to reflect the modern investing experience, how do we compare how funds did in the past before these shares existed?

The Investment Association (IA) has given the industry’s answer.

Funds that launched clean-fee shares to comply with the RDR will have long-term data synthetically created. The past returns of the old commission-inclusive shares will be added onto the more recent returns of the new clean shares.

But there’s a problem. Many fund houses didn’t launch new share classes at all. Instead, they made existing clean institutional shares available to retail clients.

That means that when the switchover happens their performance will suddenly look far better – as if they were cheaper all along.

To its credit, the IA has been quite clear that there is simply no way to accommodate all funds on the same terms in the new environment. Its solution is the most “effective and pragmatic”. It advises that the only way to achieve parity would be for funds to start reporting returns gross of fees, but no such returns actually exist.

Make no mistake, thanks to compounding, the difference in price between the new and old shares – generally 75 basis points (bps) a year – has a massive effect over the long term.

The long-term rankings are going to reshuffle overnight, to the detriment of firms that launched new RDR shares. But those firms’ synthetic returns will actually come closer to the experience of most retail investors.

The IA’s solution is pragmatic, but let’s face it – long-term fund data is about to become misleading.

Perhaps the data providers could add a synthetic 75 bps-a-year loss to the pre-2013 returns of funds whose old institutional shares are now available to retail.

In the interest of avoiding the finger of blame, perhaps these funds should just take the hit.