Opinion  

One step forward, two steps back on disclosure

Dan Jones

In recent years, the phrase “no one cares about Investment Association sectors” has become a bit of a cliché.

No fund selector wants to give the impression their process is reliant on plumping for the portfolio that tops the performance tables – or a universe that is not comprehensive.

The industry’s belated focus on client outcomes has also affected the sectors’ usefulness: hence the trade body’s ongoing look at how to overhaul the way in which it categorises funds.

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Nonetheless, the news that the IA is to look specifically at its yield requirement for UK equity income funds, as revealed in this issue of Investment Adviser, should be welcomed – and not just by the fund groups whose products have failed this test.

For one thing, the sectors serve as a useful starting point for fund selection among retail investors. Income funds forced to move to the UK All Companies sector, as many have been, complicate this practice.

A more common cliché is relevant here: out of sight, out of mind. You can be sure that sales and marketing departments will have worried about the impact of a fund no longer being ranked alongside its natural peer group.

It’s not much of a stretch to see how these considerations could push managers to buy up high-yielding stocks simply so they remain in the sector.

That’s one outcome no personal investor, adviser or wealth manager would want.

Some may suggest the problems facing income managers are just the result of short-term market dynamics – but I’d note many of these post-crisis phenomena are proving harder to shake than first thought. Regardless, one solution proposed by the consultation looks particularly attractive.

I’m referring specifically to the idea of scrapping the yield requirements and replacing them with greater disclosure of income-related information.

The suggestions made by the IA’s consultation, such as the income paid on a £100 investment over the past five years, look very sensible. To me, it’s a no-brainer that investors who need income will find these metrics much more useful than a fund’s historic yield.

Less controversial, too, than recent efforts from European regulators. Finalised proposals for the Priips legislation were also released this month, as we report elsewhere this issue. They confirm that another industry cliché – past performance is no guide to future performance – has been taken to heart by regulators.

Ucits fund factsheets, as of 2019, will instead have to show a range of “future performance scenarios”. Add the IA and the European proposals together, and it looks like a case of one step forward, two steps back when it comes to disclosure. I await the inevitable “future performance scenarios are no guide to future performance” disclaimers.