By annualising a fund's performance over a number of years a manager can smooth out the volatility and give a false impression about performance.
"Potentially an investment statement may mislead or confuse the investor where annualised rates, but not the actual annual rates, are disclosed," the commission says.
Securities Commission chief executive John Farrell says the practice of annualising returns is a common in the industry in New Zealand, however it appears to be something which isn't done in other jurisdictions.
One of the ironies about this issue is that fund managers are not legally required to disclose performance figures in their investment statements.
Investment Savings and Insurance (ISI) Association chief executive Vance Arkinstall says some fund managers decided to use the information as it would be of benefit to investors. As such the association has a standard about how returns are disclosed.
Following discussions with the Securities Commission the ISI has adopted some new guidelines relating to the use of annualised returns.
However the two commission proposals the ISI did not agree with were:
Putting the actual rates of return in an investment statement when annualised rates are used, Disclosing the differences between annualised rates and annual rates in advertisements when there is a significant difference.
Farrell says the potential problem of a manager taking a single quarter's return and annualising doesn't appear to be a problem.
Arkinstall says such a practice would not be tolerated by the ISI.
"We would be totally against it," he says.
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