Retail investments in mutual funds are expected to record remarkable growth in Asia Pacific over the next decade, fuelled in large part by increased levels of wealth and financial assets in China and India.
However, because financial literacy is relatively low among a large percentage of the population in these economies, better disclosure is needed to help investors keep track of their investments, in an easily accessible reporting “language.” As a result, reform efforts in recent years have focused on the frequency, form, format, and content of retail fund reporting that balances the costs and benefits to investors.
CFA Institute, continuing its focus on investor protection and education, has released a discussion paper to solicit input from members in Asia Pacific on existing regulatory requirements and practices in their respective countries. The paper focuses on the following:
- Frequency of disclosures
- Fund fees and charges
- Fund performance and returns
- Fund holdings and asset allocation
- Conflicts of interest and management discussion
It had been suggested that the Australian experience showed that higher levels of disclosure might not necessarily result in higher levels of retail investor understanding; instead, the high volume of information could have made it difficult for investors to understand the disclosures.
It is the position of CFA Institute that investors would benefit from more frequent information for reviewing the performance of their investments, comparing that performance with that of other investment products, and making better informed investment decisions overall. Market observers will also benefit because better access to timely data will enable more robust analysis of these investment products.
Currently, audited annual reports highlighting the funds’ operations and performance are mandatory for all investment funds. Most A.P. countries have increased this reporting requirement to at least twice a year; only China requires quarterly and monthly reporting. We’re particularly interested in CFA Institute members’ feedback on the appropriate frequency for periodic disclosures, and the pros and cons for more frequent disclosures.
Investors expect transparent disclosure of fees and expenses, including their impact on fund performance. Disclosure of past years’ expense ratios would help the retail investor to determine whether costs have increased. We want input on the “value add” from the disclosure of fees and charges (current and historical), and the pros and cons of retail investors being aware of transaction costs.
A retail investor opens his fund report, looks at the net asset value (NAV), and makes a quick judgment regarding the return on his investment. However, not many are aware that the return on investment is not derived by such a simple calculation. It can be a bit more convoluted because there are various ways to calculate the return, including the timing of cash flows.
In the review of the governance, efficiency, and operation of Australia’s superannuation system in 2010, it was noted that member benefits should only be distributed on an after-tax basis and after all costs have been deducted; otherwise, the investment returns can be illogical and misleading.
This discussion paper will bring to light the regional differences in the calculation of returns (net or gross of fees) and whether it should be presented to investors on a before- or after-tax basis. CFA Institute members are asked to analyse the issue of standardising how returns are calculated and presented. Does it allow meaningful comparisons for investors? The paper encourages members to evaluate whether benchmarking is an effective indicator of performance.
Two major issues with disclosure of portfolio holdings is the extent of disclosure of funds’ assets and noticeably lacking non-financial disclosure, such as the names and tenures of the portfolio managers. The rationale behind this disclosure is that turnover in the ranks of portfolio managers may signal instability issues at the organisation. Indeed, the departure of a decision maker brings into doubt the relevance of the funds’ performance track record. Another area for disclosure is management’s commentary on the operations of the fund, particularly whether there were significant changes in the fund during the review period, and reasons for those changes.
We urge members to submit responses to the discussion paper by 30 June to email@example.com. We also welcome your feedback in the comment section below. Your views will help CFA Institute bring uniformity to retail fund reporting in the Asia Pacific region.