Vital to keep investors informed

The number of companies listed on the Australian Securities Exchange currently stands at about 2,230. Of those, about one-third are based in Western Australia.

Nearly all of those companies have a June 30 or December 31 financial balance date.

Consequently, they have lodged their interim or annual financial statements with the ASX over the past few weeks, with a heavy weighting towards the end of the month.

This flood of announcements during the ‘reporting season’ has been happening for many years; it’s been a problem all those years, and the problem only gets worse as the number of listed companies grows.

It’s a problem for audit firms; they are stretched very thin by the need to sign off multiple financial statements during a brief period of time.

It’s a problem for finance journalists, who struggle to stay on top of all the announcements, let alone subject them to any sort of meaningful scrutiny.

Similarly, analysts at stockbroking firms and institutions are unable to attend all of the briefings put on by listed companies, nor do they have time to carefully study the accounts and update all of their spreadsheets with the new data

Calls for the reporting season to be widened have fallen on deaf ears; let’s revive that debate in the interests of maintaining a properly informed market.

The number of companies that listed on the ASX last year totalled 127, and another dozen or so have listed this year.

Every one of those companies lodged a voluminous prospectus with the Australian Securities and Investments Commission.

Each prospectus would have been packed with detailed information that few, if any, investors bother to read.

ASIC has it’s own review program that picks up some deficiencies.

That results in stop orders being placed on some companies, and occasionally results in a prospectus being withdrawn.

However, that review process has done little to engender confidence in the capital raising process.

Investors who delve into a prospectus are looking for a succinct guide to the key risks and the opportunities associated with the investment. Instead they get pro forma descriptions of all the possible risks associated with virtually any business.

The same issue applies to superannuation funds and managed investments.

They all send weighty reports to their investors, yet it’s a battle to cut through the detail to really understand how the money has been invested, what risks are involved, and even what returns have been achieved from different investments.

Many investors stick with real estate because they see it and they understand it. They shy away from listed securities and superannuation, despite the tax advantages and diversification benefits that can be achieved.

Regulation cannot solve all problems, and it certainly cannot save some investors from their own worst instincts.

Yet a recent ASIC consultation paper on hedge funds makes me wonder how much we are trying to achieve in the regulatory field.

ASIC noted that “hedge funds, because of their diverse investment strategies, complex structures and use of leverage, short selling and derivatives can pose more diverse and complex risks for investors than traditional funds”.

That’s very true but is a prospectus, or product disclosure statement, or any other document, going to enable the average mug investor to make a properly informed decision?

The reality is that many investors follow individuals, usually people with a track record of success.

Investors also follow individuals with ambitious plans, people like Andrew Forrest who took Fortescue Metals Group from nothing to the great success it is today.

This does not excuse Mr Forrest from complying with the same laws as every other company director.

Nor does FMG’s stunning success, and the gains achieved by investors, absolve him from any breaches. Mr Forrest’s actions should be judged by what he said at the time, not by the company’s subsequent success, and an appeal to the High Court will be the final test of that.

In the interim, investors will continue making their own judgements about where to invest.