Three fund managers alter documents to include benchmarks

Three big names in Britain’s investment industry have changed fund documents after being accused of flouting EU rules that require fund managers to tell clients how they have performed against their chosen benchmarks.

Fidelity International, Aberdeen Asset Management and Halifax did not disclose how certain funds performed against a benchmark in documents, seen by FTfm, that help clients decide which product to buy and whether funds are truly actively managed.

This meant retail investors were left in the dark about the relative performance of these funds.

Under European rules governing the retail investment industry, funds that have a benchmark must disclose this in their key investor information documents — a two-page overview of a fund’s characteristics, known as a Kiid — and display the performance of that benchmark.

Until February of this year, Fidelity’s £479m Select Global Equities fund did not disclose the performance of its benchmark, the MSCI world index, in its Kiid. The benchmark’s performance has been added to an updated version of the document.

Aberdeen Asset Management’s £160m Emerging Markets Quantitative Equity fund also did not disclose its performance against a benchmark in an investor document dated July 2016. However, the Kiid document stated it seeks to achieve a similar level of risk to the MSCI Emerging Markets index.

In a more recent version of the same document, updated in March of this year, it shows the performance of the fund against the MSCI Emerging Markets index.

Two Halifax products — the £94m Japan fund and the £20m Far Eastern fund — have similarly updated fund documents this year to include their benchmark performance for the first time.

The updates have come as consumer campaigners and regulators across Europe have increasingly scrutinised the disclosures asset managers make to investors. The concern has been that investors struggle to assess whether they are getting a good deal due to confusing marketing materials that contain unclear objectives.

There are also widespread fears that European investors have put hundreds of billions of euros in so-called closet-tracking funds that charge high fees for active management but invest like a simple index tracker. If investors cannot compare the performance of a fund against its benchmark, then it is difficult to determine whether a fund is a potential closet tracker or not.

Better Finance, a campaign group that lobbies for investor rights, first highlighted the problem of funds not disclosing their benchmark performance in February after launching a wide-ranging investigation into the closet-tracking phenomenon.

Better Finance estimates that dozens of funds registered in Luxembourg do not disclose their benchmark performance. It added that Fidelity, Aberdeen and Halifax should have displayed this information in their Kiids under EU rules.

Guillaume Prache, managing director of Better Finance, said the fact that so many funds failed to disclose this information “highlights the poor enforcement of investor protection rules in the EU”.

Last year, the UK’s financial regulator called on asset managers to clarify their investment objectives after finding widespread failings in fund managers’ marketing materials.

A spokesperson for Halifax said the changes to its fund documents were prompted by the FCA “clarifying the requirement” to include benchmark performance comparisons following last year’s industry review.

A spokesperson for Aberdeen said: “The fund is not benchmarked against the MSCI Emerging Markets index and so the performance of that index was not required in the Kiid. However, having considered the matter further following the Better Finance research, we appreciated it is a fine distinction and one which might be unclear to investors. We felt it would not be unhelpful to include the index performance.”

A Fidelity spokesperson said the missing benchmark performance was a “technical oversight which we have rectified”.

Esma, the European markets watchdog, said it is a “clear requirement” for funds that refer to a benchmark in their Kiids to display the performance of that benchmark.

A spokesperson for Esma added: “Esma is currently discussing issues around closet indexing with national [regulators], including the findings of the Better Finance research, and we will decide in light of those discussions whether to take further steps.”