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ombudsman news

issue 5

May 2001

performance management

management fees

In November 2000, AUTIF (the Association of Unit Trusts and Investment Funds) organised a survey of 503 people chosen at random from those who contacted its Unit Trust Information Service. These people were told some of the reasons investors had given for choosing investment funds rather than another type of investment, and they were then asked to state how important each of these reasons was to them.

The principal reason that the people surveyed gave for preferring investment funds rather than other investments was that they give investors "the chance to make more money than from a bank or building society". "Professional fund management" was another popular feature, especially among those with a better understanding of investments funds; it was cited by 61% of respondents, 5% more than in a similar survey undertaken the previous year.

As in previous years, "past performance" was the factor that those in the survey thought the most important when they were selecting a specific investment fund. The FSA has initiated a debate in this area and is excluding past performance from the comparative tables it is launching to help consumers make an informed choice on a range of different investment products.

Our own experience reflects the findings of the AUTIF survey that, currently, investors do rely heavily on past performance when selecting a specific investment fund. A significant number of the complaints we deal with under the rules of the Office of the Investment Ombudsman are from investors who are unhappy with the performance of their investments and seek a refund of all or part of the management charges.

Generally speaking, the fact that an investment has performed badly is not something the ombudsman will treat as a valid complaint, because of the subjective nature of investment management and investment selection. For a complaint of this nature to succeed, it will be necessary to show that the investment manager has been negligent. Investment management calls for the making of fine judgements based on subjective elements. The fact that such judgements may subsequently turn out to have been "wrong" (in the sense that - with the benefit of hindsight - a different course might have produced a different or better result) does not of itself prove negligence. Furthermore, although there are many different techniques involved in recommending or selecting investments, the one thing they have in common is that they do not always work. Quite simply, unless an express or implied guarantee is given, there is no guarantee of success. We will not usually recommend that a firm refunds its management fees unless we are satisfied there has been a total failure to manage.

Walter Merricks, chief ombudsman

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.