Managers get benchmark leeway

A new exemption has been signed off that offers managers a way around the requirement to compare their funds to an appropriate market index.

Tuesday, July 24th 2018, 6:00AM

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. That was especially true of alternative funds and multi-sector funds.

An exemption came into force this month that allows managers in that situation to use the return on a peer group index or composite index instead.

“This means the register entry and fund updates must contain information in relation to the peer group index or composite index, instead of an appropriate market index,” the FMA said.

That could mean a collection of hedge fund that invested in a specific asset class.

If the manager cannot identify a suitable peer group index, they are exempt from the requirements to provide information on an index. But they must lodge a document on the register entry that explains why there is no appropriate market index and no suitable peer group index or indices for the exempt fund; and include an explanatory note in its fund updates to the same effect.

They cannot use absolute return benchmarks.

Chris Douglas, outgoing director of manager research ratings at Morningstar, Asia-Pacific said it was important that fund manager chose a relative benchmark that was in line with the fund’s objectives.

“In some more niche products this is very difficult, but I still think that fund managers can show a reference benchmark. Otherwise, how can you be sure the fund manager is delivering for investors?”

The FMA said it acknowledged a range of concerns had been raised by managers.

“To the extent there are broader policy issues with the market index requirement, we are of the view that these would be best addressed through law reform. Fundamental changes to current settings are outside the scope of our exemption powers. As a result, we have discussed with MBIE that the policy behind the market index requirement, and the way it operates, could be usefully reviewed."

Tags: funds management

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