Fair play for investors - improving fund disclosure

Have you ever read a 75 page prospectus and at the end wondered what it was all about?  Offer documents have historically been long, complex and impenetrable.   Sometimes that has been the fund manager’s fault, more often it has been poorly conceived legal requirements. 

The FMA’s guidance note on good disclosure marks a turning point – we now have an over-riding principle that offer documents need to be “clear, concise and effective”.  We also have a new offer regime on its way with a “product disclosure statement” (or “PDS”) replacing the investment statement and prospectus.  The new regime will have a 2 year transition period meaning current disclosure documents will be with us for some time yet. 

Despite notable disclosure improvements in recent years, some bad practices still slip through the cracks.  Below we list three we have seen in current offer documents which fail the test of fair play.  The use of these practices is not widespread (we are talking a small number of managers), but they just shouldn’t be happening at all.

1. Disclosure around fund set up costs
It is little known that fund managers often recover fund start-up costs of a fund from investors. This is like establishing a new business and charging an extra levy to customers for a good chunk of the start-up costs.  In the case of the funds industry the costs can be significant (particularly for the first issue by a manager).  Costs come from not just preparing a prospectus but also from detailed tax advice, reviews by the trustee’s lawyers, printing of investment statements and plenty of other hidden charges that in total can approach $200,000.
Charging these costs back to the fund can heavily disadvantage the first investors who buy units.  If the fund is small (which is often the case with new funds)  then the charge will have a material impact on fees.  Charging set up costs should not necessarily be outlawed – but it should be fully disclosed.