If i was a betting man,
I’d wager one of the most long-standing issues in the mutual fund industry — and other
financial services industries — is how much disclosure investors want or need.

A recent piece of legislation on this topic is NI81-106 (on investment fund continuous disclosure), which came into force on June 1. NI81-106 sets out a nationally harmonized set of continuous disclosure requirements for investment funds. It is exhaustive in outlining the contents for items such as financial statements, management reports of fund performance and annual information forms. Among other things, the plan is to remove much of the historical fund performance from a fund’s prospectus, and put it into a separate report sent to investors along with the fund’s financial statements, keeping the financial information together. Whether the requirements achieve the goal of more useful information for investors (rather than simply more information) remains to be seen.

The goal to provide investors with better information, in the appropriate format, has been ongoing. For example, the simplified prospectus set out in NI81-101F1 requires a different kind of disclosure — that of risk. But rather than going into detail about what kind of risks should be outlined, the regulation is strangely quiet. It states that firms must disclose risks associated with investing in funds, but does not tell us how.

The board of directors of the Investment Funds Institute of Canada has now approved a recommendation from one of its working groups that will provide for more consistent compliance in disclosing risk. It will provide for more consistent methodology, terminology and disclosure in defining fund volatility in prospectuses.

Of course, there is more than one way to measure risk. The group set up a list of criteria and went about finding the kinds of risks that would complement them. It was important that the risks be easily understood by investors, and that there are enough categories so risks could be classified by whatever standard was chosen. The working group looked at a number of methods before coming up with standard deviation, which measures upside and downside potential, and provides a quantitative framework for assessing fund volatility. On top of that, most people understand it and many companies already use it.

Risk cannot be defined by one measure alone — even volatility is not a complete measure of risk — but, as the industry asked IFIC for guidance, “fund volatility risk” is our working group’s guidance for now.

Most important, this will also help investors compare and assess funds. Advisors will be seeing a lot of this kind of disclosure in prospectuses in the months ahead. Prior to this recommendation, advisors collected and analysed “know your client” information to determine their client’s risk tolerance. Providing a more consistent categorization of funds does not change that at all.

The IFIC working group has recommended six categories of volatility risk, ranging from very low (such as Canadian and U.S. money market funds) to high (such as emerging markets, science and technology, and alternative strategies).

Significant input into these recommendations has been made by IFIC members and the
Ontario Securities Commission. Many managers are already using these kinds of classifications, and the rest can follow as they see fit. It is important to note they are only recommendations and not mandatory. But it is better for the industry to take the lead, through its voluntary association, IFIC, and self-regulatory organizations such as the Mutual Fund Dealers Association than to wait for government regulators to do so.
Our understanding of industry issues and practices, and ongoing commitment to investors, will ensure stringent, workable rules supporting investor confidence in Canada’s fund industry. IE

Tom Hockin is president and CEO of the Toronto-based Investment Funds Institute of Canada.