When a fund that screams success doesn't do what it says on the tin ...

Sam Dunn reports on moves to protect investors from misleading claims in adverts
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The Independent Online

Slick advertisements aren't just the provenance of sleek sports cars and exotic cosmetics. The financial services industry is also awash with highly polished marketing campaigns encouraging us to spend our money. Think of the ubiquitous Howard Brown at the Halifax and the black horse used in the Lloyds TSB ads.

Slick advertisements aren't just the provenance of sleek sports cars and exotic cosmetics. The financial services industry is also awash with highly polished marketing campaigns encouraging us to spend our money. Think of the ubiquitous Howard Brown at the Halifax and the black horse used in the Lloyds TSB ads.

The latest celebrity endorsement comes with Barclaycard recruiting Friends star Jennifer Aniston as the face of its new campaign, even though research from Raising Standards, the quality mark scheme, suggests just 1 per cent of us are swayed by such endorsements.

But it isn't just our own cynicism that stops us falling for beguiling advertisements: the regulatory bodies have also taken steps to protect us from some of the more outlandish claims made by the finance companies.

Barclaycard had its knuckles rapped in November when the Office of Fair Trading (OFT) forced it to withdraw its "0 per cent forever" deal, trumpeted in an advertisement, for being "highly misleading"; the interest rate paid by customers on balance transfers was far higher in many cases.

And last week City watchdog the Financial Services Authority (FSA) introduced more consumer protection, preventing fund managers from "cherry picking" their best performance figures to use in their adverts. Managers must now disclose year-on-year statistics when using past performance figures in marketing campaigns, rather than plucking out the most eye-popping headline figure.

In the past, for example, an investment house with a fund that had done well over five years but not so well over, say, 12 months might well have used the five-year figure in its advertising. But under the new rules it would have to reveal its performance - good or bad - over individual 12-month periods.

Expressed as a percentage rise or fall, the FSA says the figures will give consumers a much clearer picture of what sort of product they might be buying - by revealing how the investment has fared each year and by highlighting any volatility.

Originally, the FSA had proposed to do away with the use of past performance figures in advertising, after research suggested this data was no indicator of future success.

But the watchdog has since come to the conclusion that such figures highlight consistency - a valuable tool in helping investors choose a fund, says Paul Ilott of independent financial adviser (IFA) Bates Investment. Two funds showing remarkably similar performance over five years, he explains, may display huge differences once this is broken down into 12-month chunks.

"As a result," says Mr Ilott, [the consumer's] choice of fund is likely to change in favour of those showing more consistent performance."

Research from Bates Investment highlights such disparities, comparing the Solus Special Situations and Artemis UK Growth funds, which are ranked sixth and eighth respectively for five-year performance out of 199 funds in the UK All Companies sector.

Their performance over a different period, though, paints a vastly different picture. If you had invested £1,000 in each fund five years ago, your Artemis investment would now be worth £1,626.60 - about £30 more than your Solus investment. But the pattern of returns from Solus has been "much more exaggerated", according to the analysis: if you had been invested in the Solus fund at any point during the past three years, you could have suffered a loss of up to 58.13 per cent instead.

"Only one other fund in the [same] sector would have produced bigger losses than this - despite the fund producing the eighth-best overall return over the past five years," says Mr Ilott.

Greater transparency may help investors decide whether to opt for a fund or not, but it should form only part of their decision - not be the sole driver.

"Fund manager moves, fund mergers and any changes in a fund's investment objectives all have to be taken into account," advises Mr Ilott. "Yet there is a danger that people will always be seduced by percentages. People are more focused on the short-term view rather than the longer term, but with stock markets you should be taking a much longer view."

Philippa Gee of IFA Torquil Clark agrees that you shouldn't put too much emphasis on performance figures. "Investors may make snap decisions after seeing a poster, but with some funds, [performance figures] are not an accurate record of what's going on 'under the bonnet'," she says.

"It is still all down to persuasive marketing and that won't stop."

Financial consumers have long displayed an unhealthy interest in percentage figures that show by how much a fund has grown. This is because they offer a tempting snapshot of potential riches. In contrast, the FSA wants to see more balanced advertising, says spokesman Rob McIvor, which might mean, say, greater use of charts and less strident slogans. "We don't want to see past performance as the most prominent thing [on the poster]. It's all about tone."

Whether you consult an IFA or do your own research, check before you buy into a fund how long the manager has been in charge: if he has recently joined, he can't claim responsibility for any stellar performance. And investigate how the fund has performed through difficult economic times.

While you should treat past performance with a degree of scepticism, if a fund doesn't use these figures at all in its advertising, it should raise alarm bells, says Mr Ilott. "The figures may not paint a pretty picture.".

Conversely, don't automatically assume the worst if an advertisement contains no past performance figures: if a fund has been around for less than 12 months, it will have no point of comparison.

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