When it comes to funds, the cheque probably isn't in the mail

PUBLISHED : Sunday, 28 June, 1998, 12:00am
UPDATED : Sunday, 28 June, 1998, 12:00am

IN good old laissez-faire Hong Kong, the rules on flogging everything from cures for baldness to instant weight-loss treatments are pretty open. But there is, or should be, a limit. Cures for cancer, for instance, are banned.

Also under severe restriction are claims about investing in unit trusts. There are sound historical reasons for this.

In the past, unscrupulous peddlers of funds would conjure impossible dreams of unlimited gains and a promised land of secure retirement.

Today, few Hong Kong investors are likely to have heard of one Bernie Cornfeld, a man who - with a team of hard-nosed salesmen - milked people's dreams for all they were worth in the 1960s.

Regular in-house sales conferences known more for their champagne swilling and bimbo wiggling than discussions on dollar-cost averaging, sales representatives who sold units in Mr Cornfeld's Investors' Overseas Services (IOS) were asked: 'Do you sincerely want to be rich?' They did, and they did not care how they did it. No promise of future wealth was too outrageous for Mr Cornfeld's sales teams, and many gullible investors swallowed the line.

It all ended in tears, losses and prosecutions, and to this day, unit trusts are viewed with suspicion in Germany, where IOS was particularly active.

In Hong Kong, the Securities and Futures Commission (SFC) monitors the marketing tactics of authorised funds to make sure investors are not being made promises that can never be kept. Even so, some strange literature does circulate.

A reader has passed on to me a letter from one of the best-known fund-management groups in the business. It breaks one of the key rules in marketing, using past performance as a promise of future growth.

There is nothing wrong with fund managers saying how well they have done in the past.

The figures can be verified easily through performance-measurement groups, such as Standard & Poor's Micropal (whose figures are used on our fund-listing pages) or Lipper Analytical Services Asia.

What my correspondent was concerned about was the assertion that the fund in question would provide a 15 per cent return every year for 25 years.

'Over the past five years, the trust has gone up 85 per cent, giving an annual return of 17 per cent . . . ,' the letter enthused.

It might have been true when the letter was written - which was fairly recently - but by the end of May, the five-year return was down to 80 per cent, which works out to an annual rate of 16 per cent.

The fund has suffered some very, very sub-15 per cent years, according to Micropal. Last year, the annual return was less than 12 per cent; there was a respectable 19 per cent gain in 1996; but that followed a sad 3 per cent return in 1995. There had been worse in 1994 - when the fund plunged 17 per cent.

So how can it have made 16 per cent annually over five years? Simple, 1993 saw a booming 70 per cent gain. When that exceptional year drops out of the five-year returns at the end of this year, things are not going to look so rosy.

Nowhere in the marketing letter was there any warning that past performance is no guarantee of future returns.

To be fair, this letter obviously was not part of the group's official literature but rather was the work of an overly enthusiastic and insufficiently trained salesman. The full prospectus would have had all the caveats in place.

Yet, it does throw up the need for investors to read carefully all sales literature they receive and take a highly sceptical view on performance figures.

Guarantees of future returns are absolutely not to be trusted. Such promises are outlawed under the Protection of Investors Ordinance.

It states: 'An advertisement should not contain words or phrases that may give investors the impression that they cannot lose money or that profits are guaranteed - unless the scheme is an authorised guaranteed fund.' So, no mention of safe, secure, protected, no-risk, guarantee or promise. No doubt the correspondent who penned this letter will, by now, have been firmly reminded of this particular section.

Investors who are concerned about sales letters should contact the SFC.

Got queries about investing in funds? Contact Ray Heath. But don't ask for advice or recommendations about individual products. Fax or e-mail to the above locations or write to him at South China Morning Post, GPO Box 47, Hong Kong.


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