Fund disclosure in the UK and Europe generally is woefully inadequate. For most funds, disclosure consists of an annual and interim report; a full prospectus and simplified prospectus (or key features document); and the ubiquitous monthly fact sheet.
The latter is usually insubstantial. Worse, the presentation can be misleading.
Many fact sheets, for example, display the annual management fee (AMC) as if it were the sum total of annual charges for the fund. This rarely is the case and fund companies know it, yet they persist in the practice.
Old Mutual Corporate Bond's latest fact sheet, for example, lists an "annual management charge" of 1.10%. Jupiter Merlin Income lists an "annual" charge in a "fund charges" table as 1.30%. Neither displays the total expense ratio (TER), which stood at 1.25% and 2.33% respectively, at last report.
The differences can be alarmingly large and leave investors unable to compare charges effectively.
Keep in mind that in the UK, there are no independent fund boards to negotiate lower fees with asset managers--the US, for example, requires this--instead, the market relies on investors to have enough information to select cost-effective offerings.
We think this is a weaker model, particularly when the relevant information is distorted and when key cost data, such as transactions costs, is simply not available.
Holdings data is not much better--it is required to be disclosed only twice a year and there can be up to a four month lag for the annual report.
If we want investors and their advisers to invest responsibly, they must know what they own (indeed, the upcoming retail distribution review makes this more necessary than ever for advisers). Moreover, we would argue that they have a right to know what they own--it is their money after all--they quite literally own the fund and the manager simply works for them.
Quarterly full holdings disclosure is easily done and despite fears about front-running from some quarters, is practiced by many large asset managers around the world, with some, including Fidelity, taking an industry leading stand with monthly disclosure.
If the big boys--who have by far the most reason to fear front-running--can do it, so can everyone else. There really are no excuses.
Management disclosure offers another area for improvement. Would you buy shares in a company that refused to tell you who the chief executive was or failed to disclose to you immediately when he stepped down? Neither would we and neither would any reputable equity fund manager we rate.
So why do fund companies think they can do differently? Possibly because they can--there is no requirement for firms to tell investors who is running their fund and no firm rules on how to report changes in management. Most make some disclosure but some just state "team" and the reporting of departures and replacements is highly variable.
In all of these cases, we think standardised reporting and dissemination requirements would go a long way to helping investors obtain better information on their funds.
For example, funds should be required in their simplified and full prospectuses to disclose the name and start date of every manager with primary responsibility for a fund, along with relevant biographical data and experience.
When there is a change, they should have to file a short prospectus addendum within a reasonable time (say five business days) that details the same for the new management and clearly states their start dates and end dates for the team.
For costs, the regulator could simply require that TERs be the minimum standard for cost disclosure on ALL fund documents, and if it really wanted to lead the way in investor protection, it would also mandate disclosure of transaction costs on a comparable, percentage basis.
Investors deserve better.
This blog originally appeared on FTAdviser.com.
