Australia’s corporate regulator is continuing its crackdown on fixed income funds that are incorrectly labelled and thereby confusing to investors.
Australian Securities and Investments Commission deputy chair Karen Chester has said that they were increasing their watch on the sector.
“Labelling matters just as much for financial products as it does for free-range eggs, where much regulatory endeavour was spent ensuring they were true to label,” Ms Chester told The Australian Financial Review.
“If a fund is claiming they’re lower risk but higher yield than everybody else that should be sounding alarm bells, but it is not,” she said.
ASIC has been conducting reviews in the funds management sector in 2020 to ensure that products are true to their labels and promotion.
“There is nothing inherently wrong with a product that is higher risk or less liquid, but the labelling has to be true,” Ms Chester said.
Volatility in share markets and extremely low interest rates have been forcing investors to invest in higher-yielding alternatives to term deposits.
Fixed Income News Australia’s editorial director Elizabeth Moran welcomes the latest action by the regulator.
“Fixed Income News advocates for greater transparency and understanding in the market for all investors and helps them understand underlying investments in more than 150 fixed income funds,” Ms Moran said.
“We believe ASIC’s actions will help investors – many of them considering the fixed income sector for the first time.
“It’s important that they understand the true nature of the underlying investment and its risk, and not be enticed by misguided labels.
“Australian retail investors are already at a distinct disadvantage in the bond market. Credit ratings are an important indication of the perceived future risk of an investment, but brokers are not able to show them to retail investors because of a quirky ASIC ruling.
“This is another area that ASIC should be urgently reviewing.”
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ASIC said this week in a statement that it undertook a targeted surveillance of 37 managed funds operated by 20 responsible entities that collectively hold approximately $21 billion in assets. This followed ASIC 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 collectively holding more than $65 billion in assets.
ASIC acknowledged that during times of market volatility, consumers may be looking for alternate investment options offering regular or higher returns, and financial product labels are used as a guide for consumers about what they are investing in.
ASIC examined the appropriateness of the product labels used by the 37 managed funds and assessed whether the funds were described and promoted in a manner that reflects the underlying assets in terms of risk and liquidity.
Karen Chester said, “Our surveillance identified two significant concerns. First, confusing and inappropriate product labels across 14 “cash” funds with under $7 billion in assets. And second, redemption features not matching the liquidity of underlying assets, with a significant mismatch in three funds with under $1 billion in assets.”
Significant concerns identified included:
Confusing or inappropriate ‘cash’ product labels:
- While most of the funds reviewed in the fixed income, mortgage and property sectors were appropriately labelled, ASIC identified concerns with the labelling of some cash funds.
- Out of the 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.
- 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. This was especially prominent in funds that use words such as ‘cash enhanced’ and ‘cash plus’ in their labelling.
- On average, funds labelled as ‘cash plus’ and ‘cash enhanced’ had more than 50% and 70% of their respective assets invested in assets other than cash or cash equivalents such as fixed income securities and mortgages.
Mismatch between redemption features offered and the liquidity of underlying assets:
- Generally, the redemption features offered by the funds reviewed in the fixed income and property sectors were satisfactorily matched to the liquidity of the underlying assets.
- In a small number of funds, there was a significant mismatch between redemption features and asset liquidity, i.e. the liquidity of the underlying assets did not support the short redemption terms offered to consumers.
Corrective action has been sought by ASIC following their enquiries.