Consultants have been battling with fund managers for years on the ‘dressing up' of track records. Yet it continues to be a challenge even more so in DC, writes Stephanie Baxter
- Consultants complain managers are still dressing up track records
- A number of issues with lack of clarity over performance data
- Becoming a bigger problem in DC funds
Pension consultants have long grappled with the problem of fund managers putting a gloss on their track records. Pulling apart these marketing tactics can take up a lot of time and resources.
Managers putting spin on performance is still a huge problem and may even be getting worse, according to Cerulli Associates. The research firm's 2Q 2016 Europe Edition cites a series of interviews in March and April with eight investment consultants who complained managers are submitting back-tested performance data as the numbers of a real fund.
Another common complaint was the lack of clarity over whether the numbers in performance data are net or gross of fees.
"While consultants may be more forgiving of the latter issue, the overriding concern is that some managers are willing to 'fudge' their way to success," according to senior analyst Tony Griffiths, who conducted the interviews.
A fund selector at one UK-based institutional adviser said they are seeing managers putting a gloss on their achievements more often. The interviewee was still surprised by the number of basic issues arising from performance reporting, even among larger fund managers.
"There was frustration on behalf of consultants that while they didn't necessarily think managers were trying to deceive them, they felt clarity wasn't there and they had to ask questions about whether it was net or gross of fees," says Griffiths. "Maybe it's borne out of an environment whereby performance feels more important than it has been for a while."
Consultants also complained about a number of other red flag behaviours including: sweeping a poorly performing product under the carpet either by changing its name or its mandate; aggregated assets of a manager or a product including segregated mandates the consultant cannot verify; data being changed without explanation between pitch and proposal; and managers launching or adapting products based primarily on market demand.
Issues for DC
Punter Southall Aspire chief executive Steve Butler has been dealing with performance data issues for the past 14 years and the only way he has gotten round them is by being "brutally strict" about the data given by managers. He says looking at numbers gross of fees is the only way to compare apples with apples. He has done this with defined benefit (DB) and is now doing the same type of analysis in defined contribution (DC).
"It's just as frustrating because I want to do it in gross but the providers want to give it to me in net," he says. "Yet net means something different for every single client they have - so there's no standard net. I'm forcing them to use gross with me but the managers will always present the one that represents them in the best light."
Another issue is where assimilated returns are used to demonstrate performance. One example is a firm saying 'our new fund manager had this great track record before us and if he had been with us during that time, he would have achieved this return'.
"It's almost a weekly conversation with managers asking us 'can we give you these returns which are not actual but a good reflection'," says Butler.
"We've always said absolutely not, we don't want assimilated returns in any way. The managers think we're being unreasonable by wanting to see a three-year track record before investing money.
"They've convinced themselves ahead of the game in lots of cases and it does cause a bit of conflict. We've had to be quite ruthless and say 'you'll have to take that out as it's not real'."
One issue in DC is where a fund is available on different pension provider platforms and pricing is very different across the platforms, which creates a lot of murkiness.
"I can decide a fund is good and invest in it, but when I come to analyse it the track record I'm looking at looks very different to the track record when it is on another pension provider's platform with their fees," says Butler.
In response to the issues raised in Cerulli's report, the Investment Association said in a statement: "The Financial Conduct Authority (FCA) has clear rules on promotion and advertising of financial products to retail customers and investment professionals and there are also Global Investment Performance Standards (GIPS) standards on performance presentation. Independent performance teams within our member firms ensure good governance and application of the standards and regulations in place."
The problem is despite being widely used, GIPS standards are only voluntary for asset managers and their compliance is not mandated by law or regulation.
"It's all there, it's just managers with new products are always looking for ways to jump the queue," says Butler. Although he says it's not necessarily getting worse and is "really just the same as it was 15 years ago".
"Managers always want to put their products in the best light - but the consultants' role is to flush out and ensure you're comparing apples with apples," he says.
Pensions Institute director Dr David Blake, who first came across this issue years ago, believes much more needs to be done.
"One of the reasons it has long been a problem is the lack of a standardised way of reporting performance, no standardised way of what's included or excluded, and no standardised way of measuring costs.
"If we had the same kind of performance standards as we have for washing machines or fridges, you would be able to compare the performance of one product better than another."
He is "not sure consultants know as much about this as they ought to", pointing out they will not know what the true performance is without knowing what the true charges are.
"We need to have standardised performance reporting, understand and capture all the different levels of costs, and ensure things can't be hidden under the carpet."
The pressure is on to squeeze value as pension schemes no longer enjoy the good returns of the past. Consultants are clearly paid to look beyond marketing fluff when choosing funds for clients but surely more needs to be done to stop managers from dressing up performance in the first place.
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