FMA warning – Don't overstate your 2020 returns

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The FMA has released a warning to fund managers to not overstate the importance of their 2020 returns due to large fluctuations in the market last year.

Thursday, April 22nd 2021, 6:14AM 3 Comments

by Daniel Smith

You see it beneath the returns graph of any fund worth its salt. Past performance is no guarantee of future returns.

But this nuance is becoming lost as certain fund managers attempt to cash in on market fluctuations in 2020 by advertising phenomenal returns.

An example of this has been NZ Funds, which put up a billboard in Wellington airport advertising 107% returns in 2020

James Grigor, chief investment officer at NZ Funds has stated that, “The reporting and advertising of annual returns has been an industry-wide practice since the very beginnings of KiwiSaver.

“Every KiwiSaver provider has these results on their website. It’s how independent organisations like Morningstar and Sorted rank and display KiwiSaver performance.

“But we respect the FMA’s new guidance, and in order to comply with it, we prepared replacement billboards, to go up before the Tuesday night deadline.”

However, Sam Stubbs, managing director of Simplicity told Good Returns that when he saw the advertisement he felt “sadness and anger”.

“The vast majority of fund managers would not advertise like this.

“Of course other players have incredible numbers too, but we won't put those numbers out because it gives completely the wrong impression on what future returns may be and it can encourage the most vulnerable and the least informed to switch funds for reasons the fund manager will know are highly unlikely to be repeated.”

Stubbs says “NZ Funds charge fees high enough to be able to afford an ethics and morals lesson, so perhaps that would be money well spent.”

The FMA seems to agree with Stubbs, coming out strongly against this behaviour and warning the funds management industry to avoid advertising large investment returns for the 12 month period preceding March 31, 2021.

The period refers to the post-March recovery which saw the economy claw its way back from the brink, resulting in some phenomenal returns for many funds, particularly those with large exposure to equities.

The FMA is concerned that investors are being told returns for the 12-month period – without the context of the dire drop that preceded it – may be misled into thinking the performance seen is typical, or that particular managers have significant, repeatable skills.

Key to the FMA is the difference that it makes to their returns if fund managers were to advertise yearly returns starting one month before the recovery. The numbers of market index performance that include the March 2020 sell-down shows the importance of the time period involved when promoting returns.

Paul Gregory, FMA director of investment management has said, “Some fund managers with growth products share our concerns and have already told us they will not be promoting performance focused exclusively over this 12-month period.”

The FMA has asked KiwiSaver providers, other fund managers, and financial advisers to:

- avoid advertising performance for the 12-month period to March 31, 2021 (or, where promotion has already happened, withdrawing advertisements and promotions)

- ensure the content does not place undue emphasis on the performance over the 12-month period.

Gregory says if providers continue to promote the strong returns seen over the 12-month period in question, “we will be closely monitoring whether doing so potentially breaches the fair dealing provisions contained in the Financial Markets Conduct Act 2013”.

The FMA's consultation on advertising is soon to be finalised.

Tags: FMA fund performance funds management KiwiSaver

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