ASIC slams funds for misleading investors

Retail investors rely on the name of the product to see what they're investing in. But watchdog finds labels sometimes mean nothing.

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The Australian Securities and Investments Commission (ASIC) has warned fund managers that the name of their products must resemble the underlying assets.

The watchdog revealed Tuesday it performed surveillance on 37 managed funds that together manage $21 billion.

ASIC deputy chair Karen Chester said the exercise showed up two major problems.

"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 3 funds with under $1 billion in assets."

When share markets are volatile, retail investors turn to alternative options, according to ASIC. And the name of the fund is often used to judge what they're investing in.

Funds labelled 'cash' were the most problematic, with 14 out of 22 having "confusing or inappropriate" names.

"Some funds that were labelled as 'cash funds' had asset holdings more akin to a bond or diversified fund, which have significantly higher risk and less liquidity compared to a traditional cash fund," stated ASIC. 

"This was especially prominent in funds that use words such as 'cash enhanced' and 'cash plus' in their labelling."

The study found those 'plus' and 'enhanced' products had on average more than 50% and 70% respectively invested in assets other than cash or cash equivalents (like fixed-income securities and mortgages).

Truthful labelling is not optional: ASIC

Chester said managed funds are not regulated or government-guaranteed, so managers must not mislead customers.

"Funds should be 'true to label'. This is not a nice-to-have," she said.

"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."

Incorrect labelling also punished fund managers that were doing the right thing, according to Chester.

"If consumers cannot rely on product labels, then it is difficult for funds to compete on a fair basis – disadvantaging both compliant fund managers and end-consumers."

ASIC cracks the whip

After the surveillance, ASIC went to 13 offending fund operators to request remediation.

The authority stated nine funds have voluntarily changed or will change the names to match the actual product. One fund will change the asset allocation to match the existing name.

Three fund operators will review their products and one fund wound itself up.

The authority urged any investors that have suffered losses from incorrect labelling to first contact the fund operator. 

If that doesn't work out, they can lodge a complaint with the Australian Financial Complaints Authority (AFCA).

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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