A new CFA Institute study on "Periodic Reporting for Retail Investment Funds in Asia Pacific" finds that harmonized standards for reporting fund performance is needed to enhance investor protection and rebuild trust in the retail funds market. The finding comes close on the heels of a recent Global Market Sentiment Survey by CFA Institute which identifies mis-selling by financial advisers as the top ethical issue in financial markets.
The "Periodic Reporting for Retail Investment Funds in Asia Pacific" report covers six markets including Australia, China, Hong Kong, India, Japan, and Singapore; and focuses on five areas including frequency of disclosures, fund fees and charges, fund performance, fund holdings and asset allocation, and disclosure of conflicts of interest and management discussions. The study was conducted with the support of CFA Institute member societies and industry practitioners in the six markets studied, along with comments from the Philippines, Pakistan, New Zealand, and Sri Lanka.
"Investors should be able to compare and assess more accurately the spectrum of funds available and to make more informed decisions. A number of markets in the Asia Pacific region have introduced mandatory pension schemes that either require the contributor to select and invest in a family of funds, or permit them to invest a portion of their savings in such funds,” says Lee Kha Loon, CFA, senior policy director, Standards and Financial Market Integrity, Asia Pacific, at CFA Institute.
Whilst investors will look at returns as a key measure, they are also seeking more information beyond just performance measures. The study calls for quarterly reporting, and greater disclosure of policies adopted by funds including policies adopted on valuing securities and portfolios, especially illiquid assets, names and tenures of the portfolio managers and how the asset manager manages conflicts of interest. Investor confidence can be further boosted with the adoption and compliance of industry codes that promote best practices, such as the CFA Institute Asset Manager Code of Professional Conduct.
The report also highlights the importance of transparency in disclosure of portfolio holdings. With the significant growth in fixed income products, disclosure of the maturity date, duration, and credit ratings further enhances disclosure of fixed-income securities in portfolios.
- At a minimum, adopt quarterly reporting of fund performance to investors.
- Adopt a common standard for calculating returns, presenting current and past performance, and selecting appropriate benchmarks. The principles stated in Global Investment Performance Standards (GIPS®) Handbook, the global standard used by institutional investors to present past performance, can serve as a guide.
- Use historical expense ratios to facilitate comparison of trends in the cost of managing the fund.
- Adopt the CFA Institute Asset Manager Code of Professional Conduct, which requires greater disclosure of policies that affect the information provided to investors.
- Harmonize regulations and best practices to improve periodic reporting of funds performance.
Summary of Findings from Study Group
Frequency of Disclosures
- Annual reports should be audited and contain more details regarding financial statements, operations, and performance of the fund.
- Semi-annual, quarterly, and monthly reporting could be less detailed.
- More frequent disclosures are desirable while semi-annual reports are becoming increasingly common and required by most jurisdictions.
Disclosure of Fees and Charges
- All fees and charges should be itemized and disclosed both in absolute amounts and in percentages.
- Calculation of total expense ratios (TERs) should be harmonized for meaningful comparison within and between jurisdictions.
Disclosure of Fund Performance
- There is a lack of a consistent methodology for calculating returns that is comparable in the Asia Pacific region.
- Historical performance should be disclosed on both an annualised and a cumulative basis for periods from three months up to 10 years since inception.
- Benchmarks should reflect the same investment style, have the same investment strategy, and fit the same investment objectives.
Disclosure of Portfolio Holdings and Asset Allocation
- Annual and semi-annual reports should include full details of assets in the portfolio, along with sector and geographical allocations.
- Fixed-income securities should have details of the maturity date, duration, and credit ratings.
Disclosure of Conflicts of Interest and Management Discussions
- All conflicts of interest should be noted, along with when the conflicts occurred in the periodic statements until such time the conflicts are no longer relevant to the short- or long-term performance of the fund.
- Annual and semi-annual reports should contain an operations and performance review, whereas quarterly and monthly reports should contain only a performance review and any material operational issues.
- Details about the fund manager should be in the annual reports, and any changes during the year should be updated on the website.