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Managers struggle to find index to report against

An exemption is being proposed for fund managers who are unable to find a compliant market index to use when they communicate to clients how their funds have performed.

Wednesday, August 9th 2017, 6:00AM 3 Comments

by Susan Edmunds

The Financial Markets Conduct Act requires fund managers to include the return of a market index in their quarterly fund updates sent to investors, under the heading “how has the fund performed”. This allows investors to compare how their funds have performed, against the wider market.

The market index must be a "broad-based securities market index" that is "appropriate in terms of assessing movements in the market in relation to the returns from the assets in which the specified fund directly or indirectly invests".

But the FMA said, in the transition period to the FMCA, some managers reported finding it hard to comply with that requirements because there was no suitable market index available.

“We agree that that the market index requirement creates challenges for certain types of funds. In our view, the market index acts as a benchmark. Where managers are unable to find a compliant market index, we propose to allow managers to provide another form of benchmark (a peer group) as an alternative.”

The challenges have been most acute for funds with an allocation to alternative asset classes, or that follow an alternative investment strategy.

“Our preferred approach is to put in place a class exemption that would allow managers to use a peer group for part or all of a benchmark if they decide there is no available broad-based market index compliant with the FMC regulations," the FMA said.

"We view a peer group as a second-order benchmark, and propose that managers are only able to use the exemption after making reasonable efforts to find a compliant market index.”

Other options it has considered and wants feedback on include allowing managers to use an absolute return benchmark, to opt out of the market index requirement or to have flexibility to provide more than one benchmark.

Feedback is sought until September 1.

Tags: Financial Markets Conduct Act FMA funds management investment

« Law changes an imperfect improvementLVR restrictions to be reviewed »

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Comments from our readers

On 9 August 2017 at 8:18 am Brent Sheather said:
This headline looks very suspect and I wonder if the following words have been left off the headline “that they can beat”. The words “a compliant market index” also look dodgy. Let’s hope that the FMA doesn’t have the wool pulled over their eyes again. I regularly see funds being compared with inappropriate benchmarks. Is the FMA sufficiently resourced to police this area? The other day I saw a fund comparing its performance pre-fees. The FMA wasn’t aware of this bad behaviour until I told them.

My experience is that it is very easy to build a composite index against which to benchmark virtually any fund. All you need to do is look at the average asset allocation and build the index accordingly. That obviously goes for absolute return funds as well. Of course fund managers know this but they also know that “the easiest way to look tall is to stand by a short person”. Let’s hope the FMA doesn’t get scammed again.
On 9 August 2017 at 10:36 am Pragmatic said:
Agree with Brent. Advisors should run a mile from any claims that there are no "relevant benchmarks available". Simularly, the regulator should reinforce their monitoring of this requirement
On 10 August 2017 at 11:34 am R1 said:
Surely the FMA should have the capacity to understand the important points Brent has made here. It is not rocket science to develop a composite index for any fund knowing what it is trying to achieve and the asset classes it is investing in to this end. It is a real worry to think they could be conned into taking advice from fund managers on this topic, the FMA should be the experts.

Regarding the fund manager using pre-fee returns to compare their performance you would hope the FMA would make such behaviour a matter of public importance and disclose the fund manager and apply some sort of disciplinary action; 'yeah right'. Another wet bus ticket moment.

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