The performance projections that investment trusts are required to include in the key information document (Kid) are almost certainly going to mislead investors, according to Ashe Windham, chairman of the £400m Ruffer investment trust.
As FTAdviser has previously reported, the performance projections that must be included in Kid documents for investment trusts, and in time, for open-ended funds, under the Packaged Retail Insurance and Investment Products (Priips) rules, have provoked considerable disquiet in the industry.
Simon Fraser, chairman of the F&C investment trust, said the requirement to include projections of future performance in the document, based on past performance during a bull market for most equities and bonds, is a potential "mis-selling scandal."
Mr Windham said: "The way in which the Kid is required to be prepared is for historic information to be used to extrapolate likely future returns.
"This creates a projection for future returns which is almost certain to be wrong, especially after a bull market in bonds which has lasted for rather more than 30 years and at a time when interest rates are at multi-generational lows.
"I was always taught not to drive through the rear-view mirror, but to look to the road ahead.
"A study carried out by the Association of Investment Companies (AIC) showed that 42 out of 384 Kids produced for investment companies indicated possible future returns of more than 20 per cent per year in the ‘moderate’ performance scenario.
"Meanwhile, 45 investment company Kids suggested possible future returns of more than 10 per cent in an 'unfavourable' performance scenario."
For its part, the AIC has called for the Kid documents to be suspended.
The trade body's chief executive Ian Sayers said the documents are “systematically flawed” due to the requirement to base the projection of future performance on past returns.
Mr Sayers said: “The evidence is overwhelming. Kids are not simply unhelpful, they are actively misleading. As more experienced investors will just ignore them, it is the less experienced who will suffer the most.
"Telling investors that they can have high returns at medium-low risk in unfavourable markets is particularly toxic and entirely divorced from reality.
"Imagine an investor who puts money into the stock market today based on the huge potential gains being shown in many Kids. Then the market suffers a significant correction. As our analysis shows, an updated Kid for the same investment might then tell the investor that they now stand to lose more money if they continue to hold. So they sell.
"It is the classic 'buy high, sell low' mistake that is doomed to lose unwary investors money and it is hardwired into the Kid. It will continue indefinitely through changing stock market cycles. The rules should be suspended now so these fundamental flaws can be addressed.
"Regulators should warn consumers who have already received these documents not to rely on them when making investment decisions.
"If regulators continue to delay taking steps to protect consumers, then they should be held accountable if investors lose money as a result and feel they have been misled.
"It is nearly nine months since these documents were first produced and the reality of them was there for all to see, yet there has been no meaningful response from policymakers or regulators."
Andrew Bailey, chief executive of the Financial Conduct Authority (FCA), has said "change is coming" to the Kid Documents, and the regulator launched a consultation on the rules.
Francis Klonowski, an adviser at Klonowski and Co, an advice firm in Leeds, said he has never paid attention to the Kid as he has other methods of selecting funds.
david.thorpe@ft.com
