Product labels misleading

Regulators have again been urged to intervene in the issue of fund promotion as some of Australia’s biggest fund managers and super funds continue to market products to investors with potentially misleading labels.

In its latest multi-sector fund report, research house Morningstar singled out a number of managers marketing so-called ‘balanced funds’ with up to 70 per cent exposure in growth assets, including Schroders and MLC.

It’s not an issue confined to the retail space, with a number of industry super funds categorised by Morningstar as ‘growth’ funds being marketed to investors as anything but. For example, Catholic Super’s ‘Conservative Fund’ has more than 60 per cent of assets in growth assets, as does AGEST Super’s ‘Moderate Fund’.

Both Morningstar co-head of fund research Tim Murphy and Chant West principal Warren Chant agree that the failure of fund managers and super funds to remain true to label is an issue that can only be addressed by a regulator — either the Australian Securities and Investments Commission or the Australian Prudential Regulation Authority. But the likelihood of this happening is slim.

Chant said his research house had approached regulators numerous times on the issue, but to no avail.

“There’s nothing we can do to make it change — it has to be the regulator. And the regulators have just sat on their hands,” Chant said.

Murphy agreed there needed to be “some regulatory steps to address this” in light of the industry’s failure to self-regulate.

“It’s been left to the industry to sort it out, and the industry has clearly not been able to.”

Murphy said there are “too many disagreements between various vested interests” about asset definitions, particularly where alternative assets such as hedge funds and infrastructure are concerned.

“Industry funds would argue that things like unlisted assets are defensive when we would argue that often they’re not. That’s where it does get a bit murkier.”

The issue of misleading fund labelling was highlighted by the dramas associated with MTAA in recent years. MTAA’s so-called ‘balanced fund’ outranked its peers with an asset allocation of 52 per cent to Australian and international equities and 48 per cent in unlisted alternative assets — with good performance swiftly reversed when markets hit turbulence.

Morningstar employs a five-tier categorisation method for multi-sector funds, with equal 20 per cent bands ranging from conservative to aggressive. In that system, a ‘balanced’ strategy is one invested broadly 50:50 in growth and defensive assets. It’s a logical system shared by a number of other research houses, including Chant West, but generally not reflected by fund managers and super funds.

Both Murphy and Chant agree it has become a norm within the financial services industry to describe 70:30 funds as ‘balanced’. But Chant argued the industry convention doesn’t match an investors’ logic, while Murphy argued “convention doesn’t make it right”.