Mutual fund risk standard is little help to investors: Expert

Mutual fund risk standard is little help to investors: Expert

Mutual fund risk standard is little help to investors: Expert 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.

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  • Ross Birney 2016-06-22 10:25:45 AM
    There are numerous problems with the current state of "Fund Fact" regulation, including:
    - given that most Fund Fact documents are significantly out of date, some over a year old, the difference between the information discussed in a client meeting and that which a client reads in the Fund Fact will only cause further confusion.
    - since the requirement to deliver a Fund Fact is tied to the account level, not the client, any client who wishes to hold the same mutual fund in their investment account, RESP, TFSA, RRSP and spousal RRSP will receive multiple copies of the exact same document. A client is not better informed by receiving multiple copies of the same document.
    - I can't recall an investment scam ever that involved a mutual fund but can think of several that involved a stock. Which type of investment truly requires enhanced review and disclosure?
    - why the focus on mutual funds specifically? Why not segregated funds, ETFs, REITs, closed-end funds, etc. all of which have far more similarities than differences with mutual funds?

    The Fund Fact document still doesn't get to the root of "Risk" nor does it help a client in determining what Risk is and how much of it they are willing to accept.

    The new regulations appear more focused on CYA than actually helping a client understand their investing activities. Once again, regulators seem to be focusing on that which is EASY to address instead of what NEEDS to be addressed.
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  • Wealth Advisor 2016-06-22 12:17:28 PM
    DanH is exactly right. Using standard deviation means that a mutual fund smoothly declining to zero is a low risk investment. In my client conversations I point out that the FF risk measurement is merely the current level of short-term fluctuation -nothing to do with "risk" ( the loss of capital).
    Investor advocates have been targeting SD for a long time as well. Everyone agree this measure is not much value, perhaps even misleading; low fluctuation=low risk=safety!???
    We know better but the regulator is not budging. What gives?
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  • Ken kivenko 2016-06-24 5:21:40 PM
    Dan H is right on the money. The risk disclosure is not just of little use, it is actually misleading.Warren Buffet has said many times that volatility is not risk. CSA should pay attention.
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