A conundrum to chew over

Fund performance fees are duplicitous and “gratuitous”, this column opined last week – after the data provider, Lipper, calculated how much some managers charge for not beating an index. A few supportive e-mails suggested we were right to denounce this practice. Perhaps the analogy with restaurants that demand tips on top of service charges stirred up righteous indigestion as well as indignation.

Fund names and sectors are also murky and “misleading”, our news pages reported on the same day – after data provider Trustnet calculated how much some “Cautious” managers invest in equities. But a flurry of e-mails from fund managers suggested we were wrong. If the proof of the pudding is in the eating, their complaint was that we didn’t have proof and should eat our words.

According to the Investment Management Association (IMA), the fund managers’ trade body: “The figures published . . . are wrong and damaging.”

This stuck in the throat, as the figures had been sourced from a well-known fund data company. So, in the tradition of AA Milne’s investigation of the butter for “The King’s Breakfast” – in which “The King asked The Queen, and The Queen asked The Dairymaid” et al – we spoke to Ginny Broad of the IMA.

Apparently, Trustnet, while correctly monitoring the performance of Cautious Managed funds, has the wrong figures for their equity holdings. “Portfolio holdings are checked monthly against the relevant definitions by Lipper, IMA’s appointed monitoring company,” said the industry body.

So we asked Trustnet where it got its figures. It thought they came from . . . wait for it . . . the IMA. Not so, said the industry body. So we asked Trustnet to check. It discovered it requested some figures from the fund managers themselves, and took others from managers’ factsheets.

So we asked Trustnet to check with the managers. One of them admitted it had given Trustnet the wrong figures for its funds’ equity holdings – because the person filling out the form didn’t understand which figures to use.

So we asked another fund manager how these misunderstandings arise. It’s because funds quote not one, but two, sets of figures for equity holdings: “Security Selection exposure” and “Market exposure”.

You might think that,
in an actively-managed fund, “Security Selection” would determine how much is held in equities. Trustnet did. And we believed them. But, apparently, we are all wrong. “Market exposure*” is the true equity content.

So what’s that asterisk about? Read the factsheet notes and you discover: “*The market exposure results from holdings of physical assets, futures & swap positions . . . However, such instruments are inherently volatile and the Fund could be potentially exposed to additional risk and costs should the market move against it.”

So let’s get this straight . . . the more derivatives a fund uses, the lower risk it appears – but private investors can’t be certain of the true equity content because different data providers quote different figures, and the IMA quotes none.

It’s like reading a menu in “restaurant French” without any prices: you don’t know what you’re ordering or how much it will cost. Bon appetit!


Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.