Is past performance now an indicator of future performance?

CategoriesEU//Financial Services//Fund Management//Regulatory//UK

Following drastic changes to reporting requirements in the investment fund industry earlier this year, European regulators began consulting this month on further regulatory updates. As the Financial Times reported, there is a growing crisis in confidence between the market and regulators concerning the methods by which investment trusts present their performance figures, namely via so-called key investor documents, or Kids. These documents use recent performance data as a measure of potential future returns, a method which has caused concern among investors and the industry itself. The short consultation period on how to amend the regulation, with submissions due December 6, has not calmed the market.

Many industry figures claim the new requirements produce misleading projections and undermine confidence in the market by providing misleading information meant to assist retail investors in making investment decisions.  JP Morgan went as far as to state publicly that the Kids for its Claverhouse Investment Trust are unreliable.

The problem is that the regulation appears to subvert the adage that past performance is not an indicator of future performance. The investment fund market has enjoyed a run of favourable returns due to consistent buoyancy in key financial markets, but using this as an indicator of future performance is risky, particularly in light of a significant tech sell-off in recent weeks, a general softening of the US market, and Brexit’s imminence. The implications for market confidence should conditions decline are clear.

The industry will be monitoring closely the outcome of the consultation, after it closes on December 6. For more information, including the consultation response submission guidance, click here. We will be submitting a response to the consultation and would be happy to assist any stakeholder should they also wish to submit a proposal to the consultation.

Rooney Nimmo is a boutique, international corporate law firm specialising in investment, transformation and growth across global markets. Our mission is to do the simple things more easily, and the difficult more intelligently.