# UK regulator to restrict the use of past performance in ads



## Brendan Burgess (2 Oct 2001)

The [broken link removed]in the UK is reviewing the rules on advertising of fund management. Its proposals are:

To ban the use of econstructed hypothetical performance
Warnings about the use of past performance must be much clearer
Past performance is no longer to be the main message of an ad

Their taskforce found that consumers don't like small print and can't interpret it.
They found that their was a weak link between past and future performance, but that it did not persist long enough to be of any use to consumers

They are planning to introduce a standardised form of presenting past performance in ads

Next month, the FSA will be producing league tables of investment products, but they will not include past performance. 

Extracted from a FT article Weekend 28/29 September


----------



## Mithrandir (2 Oct 2001)

*Re: UK regulator to restrict the use of past performance in*

What is required here is the adoption of the US standard in performance, evident by the manner in which fund data is presented in OEICS. There is NEVER comparison against peer averages. Just the index. There is a list of data measures such as volatility, sharp, etc. There is a compulsion to present data on a specified calender basis only, ie you can't select any period you like. There is a requirement to specify the investment policy, ie the type and nature of risks taken. All maximum fund charges must also be displayed. 

As an example see www.jpmorganfleming.com. 

Similarly ads cannot deviate from the exacting formula of fund presentation. Such a move by the FSA is long overdue. But don't expect Irelands club-like investment community to jump at this type of change. I recently mentioned to a leading stockbroker director that in 10 years I'd never run across oone of its private client portfolio's where its performance was indexed measured. He merely glared, I thought.


----------



## Galileo (2 Oct 2001)

*Re: Mithrandir's Comments*

With all due respect, I think <!--EZCODE ITALIC START-->_    Mithrandir_<!--EZCODE ITALIC END--> is rather missing the plot here.

From BB's opener:<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr>    <!--EZCODE ITALIC START-->_    "They found that there was a weak link between past and future performance, but that it did not persist long enough to be of any use to consumers"_<!--EZCODE ITALIC END--><hr></blockquote><!--EZCODE QUOTE END-->

This is saying in effect that past performance is next to useless.  <!--EZCODE ITALIC START-->_    Mithrandir_<!--EZCODE ITALIC END--> is actually going in the other direction and arguing that with a much more in depth and correctly constructed demonstration, past performance is still very relevant.

Imagine what this would do to the whole industry of professional advice, if the above quote was actually accepted.  What else is there to advise on?:eek


----------



## UDS (2 Oct 2001)

*Re: Mithrandir's Comments*

<!--EZCODE ITALIC START-->_ “This is saying in effect that past performance is next to useless.”_<!--EZCODE ITALIC END-->

No, it isn’t.  It’s just saying that past performance is next to useless <!--EZCODE BOLD START-->* as a predictor of future performance*<!--EZCODE BOLD END-->.  But a comparison of the past performance of a specific product against past performance for the same period of an appropriate benchmark index can tell us a good deal about, say, the practical effect of the charges embedded in the product, or the extra return (if any) which the fund manager has achieved in return for the extra risk (if any) which he undertook, and much more besides.

Most punters aren’t going to be able to undertake this degree of analysis themselves.  But competent advisers should be able to put this information to effective use.


----------



## Mithrandir (3 Oct 2001)

*Looking out the rear window*

UDS got my point right, but I clearly wasn't plain enough if Galileo didn't. Sorry. Past performance is used in isolation to peddle certain products.

It is of course as useful as steering a car by looking out the back window only. And my point is that even the presentation of historic performance is pretty far behind international standards.


----------



## Sir Ivor (3 Oct 2001)

*Re: Looking out the rear window*

I am disappointed at <!--EZCODE ITALIC START-->_   UDS'_<!--EZCODE ITALIC END--> comments as usually she shows a fairly astute awareness of the issues.

The effect of charges is illustrated most clearly in  the new Regulations.  Trying to distil out the fairly miniscule effect of charges from past performance is futile.

As to demonstrations of recent relative out performance of managers against benchmarks the whole point of the FSA intervention is that this is <!--EZCODE BOLD START-->*   "next to useless"*<!--EZCODE BOLD END--> as a pointer of long term future prospects.

Of course <!--EZCODE ITALIC START-->_   Mith_<!--EZCODE ITALIC END--> is right, if we are going to pour over past performance at least let us do it fairly by accepted international standards, but does he accept the underlying premise that even perfect hindsight is <!--EZCODE BOLD START-->*   "next to useless"*<!--EZCODE BOLD END--> for foresight. :rolleyes


----------



## Brendan Burgess (3 Oct 2001)

*Re: Looking out the rear window*

I think that only a very small minority of people understand that past comparative performance is irrelevant in predicting future performance. 

I like the American idea of showing the comparison to an index under strictly regulated conditions. This would show the huge impact of charges and that is a good thing.

Brendan


----------



## Sir Ivor (3 Oct 2001)

*Re: Looking out the rear window*

Don't agree, oh Leader.

Charges are adequately disclosed in the current regulations against that most perfect of benchmarks, that all future returns will be 6%.

I am convinced that the obsession with past performance analysis is nothing more than a fraudulent justification of the advice industry.|I


----------



## UDS (3 Oct 2001)

*Re: Looking out the rear window*

Hi, Sir Ivor

<!--EZCODE ITALIC START-->_ “The effect of charges is illustrated most clearly in the new Regulations. Trying to distil out the fairly miniscule effect of charges from past performance is futile.”_<!--EZCODE ITALIC END-->

The effect of  charges is not “fairly miniscule”; it is often extremely significant.

The new regulations are certainly useful, but they illustrate the effect of charges against a hypthetical future return which is almost certainly not the return which will in fact be achieved.  This can lead to its own problems; how many posts have appeared on this board from people who evidently believe that there is some implication in the charges illustration that the assumed return is likely to be achieved?

A comparison of past performance against an index shows the negative effect of charges (and the positive or negative effect of stock selection) in the context of an actual return.  If, as is so often the case in Ireland, the manager is a closet tracker then the bulk of the difference between the actual return and the index return will be accounted for by charges and (unless the manager changes his strategy, or the rate of his charges) <!--EZCODE ITALIC START-->_ there is a better than random chance that it will persist_<!--EZCODE ITALIC END-->.  Thus the comparison, coupled with information about stock selection, volatility, etc, is a useful tool for investment analysis.

I think we all agree that past performance on its own is useless for predicting future performance relative to other products (the purpose for which it is usually used in Ireland) or for predicting future performance in absolute terms.  Past performance measured against a benchmark index, and coupled with other information, is a useful investment analysis tool.  In my view it should not be featured at all in advertising aimed at consumers, but product providers should be allowed to publish and disseminate the information, preferably on standard terms as Mithrandir suggests.


----------



## Copernicus (3 Oct 2001)

*The negative effect of charges...*

Speaking of "the negative effect of charges", did we ever get to the bottom of how much Quinn Life were charging to their funds on top of the published management fee?

I seem to remember a suggestion that was based on looking at their past performance against the ISEQ (an approach now being extolled by Mithrandir).


----------



## tortoise (11 Oct 2001)

*rear view*

nothing wrong with a rear view so long as it reflects reality and is used to educate...wonder how many would be comfortable with a scenario view factoring in a potential loss & gain rather than the bland statement that prices can rise as well as fall !
Strikes me that an honest educated view will help create an ethical basis on which to advise rather than continuing to use what are in effect smoke & mirror marketing spins. The decoupling of independent transparent educated advise from provider jargon is the greatest challenge. Independent Advisors will find that the communication of information will become the key differentiator and thus critical success factor over time. 
Their choice lies in where they want to set their cross bar..set it too low and the mass marketeers will win every time. Of course one of the outcomes will be an initial shrinking of the "sophisticated" investor pool as advisors beging the process of gradual education moving their clients along the "sophisticated" continuum. Knowledge management and investor education will take time and money.

Aesop: the hare and the tortoise

Tortoise


----------

