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Fund ads in ASIC’s sights

ADVERTISING by fund managers is unbalanced and focuses unduly on short-term historic returns, an academic study has found.

The study was commissioned by ASIC, which is seeking to improve the quality of advertising in the managed funds industry.

“ASIC wishes to ensure that past performance information is used responsibly in advertising and is not misleading,” ASIC executive director of consumer protection Peter Kell said.

The academic study suggests this has not been the case.

Co-authored by Edith Cowan University’s Peter Gerrans, the study analysed advertisements in five Australian finance magazines over five years.

It found more than 70 per cent of ads for specific products featured their historical returns.

“This emphasis on returns is not balanced in two major respects,” the report says.

“Firstly, the focus is very short term, with more than 65 per cent of these ads using only the past year’s return. This is not due to lack of data.

“Secondly, there is not a corresponding focus on the risk attached to these returns.”

The study also found a lack of consistency in the choice of benchmark for comparing a product’s performance.

ASIC has issued a draft guide to assist industry on the use of past performance information in advertising.

The guide proposes that ads with past performance figures should always provide a five-year return figure in addition to figures for any other period.

Performance figures should be up to date and be calculated after all on-going fees have been deducted.

‘Hypothetical’ or ‘simulated’ past performance figures should not be used in ads and promoters are encouraged not to give undue prominence to past performance information, the guide says.

The ASIC guide also proposes that information about returns should be balanced with key information about risk.

ASIC said research it had commissioned indicates many consumers appear to put undue weight on past performance when choosing individual investments.

The research found past performance is a weak and unreliable predictor of future performance over the medium to long term.

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