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This web site is dedicated to investment fund investor education and protection. The multi-billion fund industry plays a key role in the savings and retirement plans of millions of Canadians. Many industry practices provide beartraps for the unsuspecting investor and securities regulations have not kept up with the pace of change in the industry.
Friday, August 22, 2014
Fund Facts Risk Disclosure Incomplete
The disclosure of risk in regulated mutual fund Fund Facts
documents is currently provided on a five point scale – Low, Low to Medium,
Medium, Medium to High, and High. As it stands,,the description of
the risk is determined by the fund manager and the risk described
captures only the "volatility risk " rather than risk more
broadly. A system developed by fund industry lobbyist IFIC is the
virtual risk classification industry standard although it has not
been subject to public comment or regulatory approval.This simple word scale masks just how bad the loss can be under a "Medium" rating. A number of commenters have observed inconsistencies and misleading ratings using this rating system.There is no
requirement to provide a benchmark and as a result there is no
context provided to allow an assessment of the described risk or past
volatility. In
a number of surveys and research reports, respondents more frequently
mention "loss of money" as their view of risk i.e. downside
risk. Thus they seek a downside risk metric.
Investors need to be able to put mutual fund risk and performance in
context in order to make an informed investment decision. Fund Facts
disclosure of risk should be improved by including a description of
the principal factors that make up the “risk” of holding the fund
in addition to downside risk measures such as worst 12 months. Most
retail fund investors do not understand statistical metrics such as
the standard deviation and should not have to. The CSA is reviewing
the situation and hopefully the recommendations of investors will be
considered. See our Comment letter
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