Paul Gregory, FMA Director of Investment Management
Paul Gregory, New Zealand Financial Markets Authority Director of Investment Management

FMA NZ cracks down on fund managers advertising “phenomenal” returns

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New Zealand’s Financial Markets Authority (FMA) is cracking the whip on fund managers who advertise “phenomenal” returns. In a note issued on Wednesday (April 21) the markets watchdog has warned managers advertising large investment returns  for the 12-month period to March 31, 2021 could “mislead investors”.

The period includes none of the severe February and March 2020 COVID-19 sell-off in the market, but all the following recovery. The result is some phenomenal returns for many funds, particularly those with large exposures to equities. .

“The FMA is concerned investors being marketed returns for the 12-month period through social media, websites and other channels, without context, may be misled into thinking they are typical market performance or that particular managers have significant, repeatable skill” the FMA statement said.

The FMA notes shifting the performance period back just one month makes a significant difference to the result, as shown in the table below. Market index performance for 1 April 2020 to 31 March 2021 (the 12-month period in question) compared with performance for 1 March 2020 to 28 February 2021 (including the March 2020 sell-down) shows the importance of the time-period involved when promoting returns:

Chart NZ MSCI SP500
(Source: New Zealand Financial Markets Authority)

“Encouragingly, some fund managers with growth products share our concerns and have already told us they will not be promoting performance focused exclusively over this 12-month period” Paul Gregory, FMA Director of Investment Management said.

“Where a provider decides to, or continues to, promote the strong returns seen over the 12 months to March 31, we will be closely monitoring whether doing so potentially breaches the fair dealing provisions contained in the Financial Markets Conduct Act 2013,” he added. “We will also be concerned for the interests of any members who joined the provider’s scheme or switched into higher-risk funds during the promotion period.

“For investors, the strong performance over the past year is not a reason to chase performance. Rather, it shows the value to investors of staying the course through market ups and downs with the manager and product you have, provided you’ve chosen the right fund for your risk needs and tolerance,” Gregory said.

Meanwhile, the UK Financial Conduct Authority (FCA) on Tuesday (April 20) warned social media firms that it will act if consumers are subjected to risky or fraudulent investments through their platforms. In a speech on Tuesday (April 20) as part of UK FinTech Week, the chief executive of FCA Nikhil Rathi said the low interest rate environment had pushed a growing number of investors to search for better returns online but too many of these opportunities proved “too good to be true”.

The City regulator fears younger DIY investors are taking big financial risks, influenced by offers on social media.