'Complete lack of interest' in prospectuses

Imposing new and costly disclosure requirements for prospectuses would be a waste of time because no-one reads them, a fund manager says.

Monday, March 19th 2012, 6:30AM 2 Comments

by Niko Kloeten

The Financial Markets Authority recently announced another round of consultation on the issue after receiving a large amount of feedback from securities issuers and fund managers on its draft guidance note.

Pathfinder Asset Management, in a joint submission with fellow boutique manager PIE Funds, said that in its current form the guidance note would be a "financially crippling burden" for boutiques, and that the FMA should focus its attention on investment statements because these are the documents that actually get read.

"We agree that the prospectus and investment statement can in theory be accessed by the same audience. However, in our experience in relation to managed funds a copy of the prospectus is rarely (if ever) obtained or
read," the submission said.

It said there was a "complete lack of interest" from both institutional and retail investors. For example, of the documents Pathfinder has distributed for its Commodity Plus Fund, 97% have been investment statements and only 3% prospectuses.

"The reasons that prospectuses are so seldom relied on in the fund management industry are well understood. The prospectus format is complex, illogical and virtually impenetrable even to an experienced reader," the submission said.

"Attempting to bring sanity and clarity to an unstructured document (the prospectus) is a near impossible task. It is also a pointless exercise given how little it is read and relied on by investors."

"The FMA's focus should be on introducing useful information from the prospectus into the investment statement. A prospectus can often include information that is not (and in our view should be) included in the investment statement."

Pathfinder executive director John Berry told Good Returns he was pleased the FMA had responded to concerns raised in the submission process.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 19 March 2012 at 11:03 pm Mike Shaw said:

I have always held the view the Prospectus should be read. I also agree with John Berry, useful information from the prospectus should be included in the investment statement.

One of the disappointments contained in recently registered prospectus is the disclaimers stated in the Auditors reports, contained within the prospectus. The Auditors are only allowing inclusion of their report in the Prospectus merely to meet certain statutes. They state unequivocally, we disclaim any assumption of responsibility for reliance on our report. This information is not included in the investment statement. Perhaps it should be.

Investment Statements need more attention, is the areas of quantifying the risks, expressing in simple maths terms what returns they may or may not get and performance fees, which could be charged, may be charged, may be introduced or may be rebated, it is enough to confuse and economist.

There is also a clear message coming from the High Courts. Several Directors defending their positions in New Zealand High Courts have admitted not fully reading or understanding their company prospectus. Perhaps if they had read and understood their prospectus they might not be in the High Court.

Next time you are with your colleagues, ask who has read a prospectus recently, the answer will probably sadly be along the lines of, are you having a laugh.

On 21 March 2012 at 10:04 am Andy said:

Our personal Disclosure Statements have been trimmed down to 2 pages - down to the absolute bare facts. To avoid clouding the facts, any other relevant and important information must be disclosed on a separate document (terms of engagement etc). Why can't an investment statement be the same?

I propose a simple 1 or 2 page document written in a standard format with a simple and consistant rating system for the type of investments. For example, a scale of 1 to 9, 1 being for High Risk/short term and 9 being low risk/long term, and scaled in between. A standard format for ALL securities and deposits, without the flowery sales gimmicks and commentary would make life easier for all investors. Then a prospectus could be offered to compliment it.

A copy of this new investment statement could be held in the clients file (just like our own disclosure statement) to clarify any future concerns and satisfy audit requirements.

There is an old acronym - K.I.S.S. - Maybe we should learn from it!