Fund managers warned to be ‘true to label’

After recent surveillance of fund managers, the Australian Securities and Investments Commission (ASIC) has concluded that fund managers need to do more to ensure that their product name aligns with the underlying assets.

It came after ASIC found that fund managers were using confusing or inappropriate cash product labels.

ASIC undertook a targeted surveillance of 37 managed funds operated by 20 responsible entities that collectively hold approximately $21 billion in assets, following concerns with product labelling practices.

These funds were identified after data analysis and an initial assessment of the product names and labelling practices of more than 350 funds in the cash, fixed income, mortgage and property sectors across funds holding more than $65 billion in assets.

ASIC examined the appropriateness of the product labels used by the 37 managed funds and assessed whether the way the funds were labelled and promoted aligned with the underlying assets in terms of risk and liquidity.

ASIC found that out of 22 managed funds with over $15 billion in funds under management that used the term cash in their labelling, 14 funds had confusing or inappropriate labels.

It found that some funds that were labelled as “cash funds” had asset holdings similar to a bond or diversified fund, which are significantly higher risk and have less liquidity compared to a traditional cash fund.

This was especially the case in funds that use words such as “cash enhanced” and “cash plus” in their labelling.

ASIC also found that on average, funds labelled as “cash plus” and “cash enhanced” had more than 50 to 70 per cent of their respective assets invested in assets other than cash or cash equivalents, such as fixed income securities and mortgages.

Despite these findings, ASIC found that most of the funds reviewed in the mortgage, property and fixed income sectors were appropriately labelled.

ASIC deputy chair Karen Chester said the corporate regulator’s surveillance exercise uncovered two significants points of concern.

“First, confusing and inappropriate product labels across 14 ‘cash’ funds with under $7 billion in assets,” she said.

“And second, redemption features not matching the liquidity of underlying assets, with a significant mismatch in three funds with under $1 billion in assets.”

Furthermore, while ASIC said that the redemption features offered by the funds reviewed in the fixed income and property sectors largely matched with the liquidity of the underlying assets, it did find that in a small number of funds, there was a significant mismatch.

It said that in these funds, the liquidity of the underlying assets did not support the short redemption terms offered to consumers.

Ms Chester said: “Managed investment products are not prudentially regulated or government-guaranteed, so it is paramount that consumers are not misled about the level of risk associated with a particular product.”

She noted that consumers may be seeking alternative investment options that could offer regular or higher returns during times of market volatility, and emphasised the importance of financial products remaining true to label to guide consumers on what they are investing in.

She pointed out that if the underlying liquidity of the fund does not align with its redemption promises, investors may be unable to redeem their investments when they expect to do so.

This could heighten liquidity risks for funds and investors, especially during times like the current economic downturn due to the coronavirus crisis.

“Funds should be true to label. This is not a nice-to-have. It’s a must-have for responsible entities in meeting their legal obligations to their investors, especially in times of market volatility.

“Inappropriate labelling of a fund can mislead investors into believing that the fund is much safer or more liquid than it actually is. Put simply, a fund should not use terms such as ‘cash’ or ‘cash enhanced’ unless its assets are predominantly in cash and cash equivalents.”

Corrective action

Following the review, ASIC has sought corrective action from 13 responsible entities where it identified mislabelling of products.

As a result, so far, seven responsible entities have voluntarily changed or proposed to change the names of their funds (nine in total) to reflect the nature of the product.

One responsible entity is proposing to change the asset allocation of the fund to reflect its name, three have undertaken or committed to undertake a review of their funds, while one withdrew misleading promotional materials on their website, and thereafter wound up its fund.

ASIC said it will continue to monitor the outcomes and consider suitable regulatory action, including enforcement action if required.

[Related: ANZ CEO laments responsible lending quagmire]