Money managers' marketing gets failing grade

Date: Friday, November 9, 2007
Author: Janet McFarland, Globeinvestor.com

Money managers are misrepresenting their performance track record in marketing materials provided to investors, the Ontario Securities Commission said in a new report released Friday.

The OSC reviewed materials prepared by portfolio managers – including managers of hedge funds and pooled funds, as well as portfolio managers who cater to institutional investors and private clients.

“We have seen a number of instances where the materials were prepared in a way that highlights or exaggerates favourable points while omitting or failing to disclose facts that maybe less favourable,” the review says.

The OSC found many of the managers gave hypothetical performance data for their portfolio, and did it in misleading ways.

In some cases, portfolio managers published hypothetical returns based on a particular investment mix or strategy that was applied in retrospect over a period of time in the past. Some managers use the strategy to attract investors when the company has little or no track record.

The OSC said this approach gives the managers the benefit of hindsight to pick investment strategies that fit the historical data, but did not occur in real market conditions.

As well, the commission said there was often no disclosure that the data were hypothetical, how they were calculated or what underlying assumptions were used.

The OSC also warned portfolio managers about presenting hypothetical performance data based on “model portfolios” that in some cases were not actually held by any of their clients. The commission said it's difficult to know if any existing clients would actually achieve those results, and said key details are omitted in the disclosure, such as whether transaction costs are deducted.

There are no specific rules for marketing by hedge funds, but the OSC said they should follow the principles of disclosure rules for mutual funds. The review includes a summary of suggested practices the OSC says funds should follow.

“Failure to follow these practices may result in inaccurate and unfair marketing materials, which we consider misleading to clients,” the commission said.

For example, the OSC said if portfolio managers want to compare their results to other benchmarks, they should use benchmarks that are comparable to the fund and are widely recognized or available.

The OSC said more than half the portfolio mangers it reviewed were deficient in their presentation of benchmarks.