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Overhaul performance disclosure, fund firms told

Overhaul performance disclosure, fund firms told

Numis Securities has called for fund groups to overhaul and harmonise performance disclosure on both a fund and aggregate level after criticising the variations in how this was presented.

The brokerage firm and research house said greater and more consistent performance disclosures were necessary in order for active fund groups to survive the onslaught of greater competition and regulatory requirements.

In a report, analysts David McCann, James Hamilton and Jonathan Goslin, said: “We believe it is becoming more important than ever that analysts, customers and [shareholders] (and other stakeholders) know which active asset managers really are delivering alpha to clients and which are not.

“It has long been a concern of ours that it is difficult to meaningfully compare and draw conclusions from the reported investment performance figures, given that both the presentation and underlying assumptions/ preparation methodologies differ for each company.”

As part of its research Numis reviewed the disclosure methods of more than 20 firms, as well as providing seven proposals on how to improve both fund and aggregate group performance disclosure.

It said individual fund performance should be provided net of all fees charged. Performance should also be compared with an explicit, accessible benchmark with matching risk factors rather than using comparisons against peer benchmarks.

Performance should be based on actual client returns rather than a representative fund class, the analysts added.

“We think [a benchmark] is more of an ‘acid test’ of alpha than comparisons to peer group averages,” the analysts wrote.

Fund factsheets currently require such information but often leave out some explicit and implicit charges and the effect of these on performance.

Numis’ proposals on aggregate fund group performance went wider, with the brokerage firm suggesting fund groups should provide performance and alpha performance on all of its assets under management, or explain why funds or mandates were not included.

Asset managers should also provide a breakdown of which funds outperformed their benchmarks and by how much, rather than the current common preference to provide a percentage figure of how many funds outperformed, Numis said. Another suggestion was for further details to be provided on how many funds had been closed and their performance, to avoid survivorship bias.

The analysts said their proposals would help both shareholders and investors decipher which firms and fund managers were delivering actual outperformance, aiding the industry.

Numus said: “We acknowledge that in practice some of the things we list here will be difficult for companies to prepare, but should not be impossible. Nonetheless, we feel these points would improve the way in which analysts, investors and others are able to make investment decisions in relation to this industry.”

The analysts added: “We believe there is still a bright future for those active funds which are genuinely able to add consistent alpha, after all fees, to clients. It is also important in our view to understand which firms have funds which are not delivering alpha, since there is likely more risk to future flows/pricing at such firms.”

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