New requirements for mutual fund companies to provide investors with Fund Facts were implemented in May – but the suggestion of a standardized risk methodology remains a sore spot with fund managers.
Dan Hallett, vice president and principal at HighView Financial Group, has been monitoring the changes to risk methodology over the past several years, and finds the current suggested standard puts investors at a disadvantage rather than improve their decision making. He has outlined his findings for the CSA during their call for submissions last December and in 2013.
“Starting in 2007, I began writing about the risk and suitability of Fund Facts, and a little over a year ago – because I was curious – I started tracking what was happening with the rating changes, whether it was for ETFs or other investment funds,” he says. “It’s going back and saying, ‘What did this fund lose in the last bear market and how long did it take to recover?’ That is really the risk metric that I’ve been advocating for in my submissions to the CSA.”
Though he supports the idea of a uniform risk standard, he feels the proposed methodology could lead to confusion among investors, as it can be subjectively interpreted in its current form.
“The main weakness of what’s being proposed is that they’re using a metric that most people don’t understand to start with, and they’re taking that and interpreting in a way that doesn’t really tell people anything,” he says.
“To take standard deviation and to map it to something called medium risk… it’s subjective in two ways,” he adds. “It’s subjective in terms of the labels the fund companies attach to their funds, but also in the way it appears on Fund Facts documents; it’s very much subject to interpretation by the user, which is the investor it is designed to inform.”
Rather than labelling funds with generic risk profiles, Hallett advocates for a detailed history and number for each fund, which he feels is more intuitive to the average investor.
“ It should show people a number and then they’ll know what kind of downside risk they could be in for in the future,” he says. “For example, if a fund during the last bear market lost 20% of its value and then took two and a half years to go from top to bottom and back up to recovery, there’s nothing to interpret.
“Here’s the number, that’s what happened, and people can decide, should that happen again, if that’s something they’re willing to live with.”
The current iteration of the CSA’s proposal – part of Stage 3 of the administrator’s Implementation of Point of Sale Disclosure Project – was last released in March. It has yet to be determined whether another proposal period will be opened for industry review, or when a final iteration of the standard will be brought to market.
announces changes in fees, risk rating
New Canadian mutual fund rules implemented today