FT : EU demands prediction of fund performance in crisis

EU demands prediction of fund performance in crisis
Asset managers will have to forecast returns under distressed market conditions

Asset managers will be forced to provide investors with predictions of fund performance in the event of another financial crisis under new European rules aimed at strengthening consumer protection.

The European Commission yesterday signed off the controversial new measures that will ensure investor documents include forecasts of fund performance during distressed market conditions.

Sven Giegold, the German MEP who is a member of the influential Economic and Monetary Affairs committee at the European Parliament, said the rules would ensure investors were better informed of risks. “This is good news for investors,” he said.

However, the contentious move has been met with anger by both investor rights groups and asset managers. They fear it will add unnecessary complexity and could discourage consumers from investing for their future.

Guillaume Prache, managing director of Better Finance, a Brussels-based group that lobbies for investor rights, said: “[This] will further confuse and deter retail investors.”

The new rules were finalised following months of negotiations between the European Commission, the EU’s executive arm, and politicians within the European Parliament.

The measures, which fall under a vast set of consumer-focused rules known as Priips, will also force asset managers to predict future performance based on three scenarios, ranging from adverse to good.

Asset managers will not be required to highlight past performance figures in the so-called key information documents.

Martin Bamford, managing director of Informed Choice, an independent financial adviser, said: “Extending the contents of these [key information documents] to include stress-test data and a range of market forecasts simply adds to the information most investors will ignore.”

Justin Bates, an asset management analyst at Liberum, the broker, said the commission was adding “a layer of additional complexity to an already contentious subject and one that will surely be open to significant interpretation and, in reality, impossible to model accurately”.

The asset management industry had undertaken a big lobbying effort to convince European officials to include past performance in the investor document, rather than predictions of future performance.

The commission ruled out this approach, although it is understood the calculations for future performance will take previous returns into account.

A spokesperson for the BVI, the trade body for asset managers in Germany, said: “We think past performance data are the most reliable performance-related information one can obtain on investment funds.”

Tristan Chapple, a director at Phoenix Asset Management Partners, a UK investment boutique, added: “Surely the best guide to future performance is a long-term record of doing the same thing?”

The commission amended the measures to include performance predictions in stressed market conditions after clashing with European politicians about the rules last year.

MEPs rejected the commission’s first set of proposals last autumn — a first in financial services regulation — as they were worried the planned changes would mislead investors.

At the time, Mr Giegold criticised the commission’s proposed formulas for predicting performance, arguing the figures contained a “huge flaw” that would make performance look far better than it is likely to be during another financial crisis.

On Wednesday the German MEP welcomed the introduction of a distressed-performance prediction. He said this should mean investors understand the “real risks” of their investments.

>>> US After Hours Summary: ELF +16%, SMTC +7% following earnings/guid


After Hours Summary: ELF +16%, SMTC +7% following earnings/guidance, APRI +34.2% on asset sale news/NDA update... TLRD -29%, SPPI -10%, WATT -7% following earnings/guidance

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: VVUS +24%, ELF +15.6%, SMTC +7%, CMTL +4.7% (light volume), ERII +3.3%, KEYW +1.9% (also signs a definitive agreement to acquire Sotera Defense Solutions in an all-cash transaction valued at ~$235 miln)

Companies trading higher in after hours in reaction to news: APRI +34.2% (completes sale of its ex-U.S. assets and rights related to Vitaros to Ferring International; co will retain its Vitaros rights in the U.S. and it remains on track to re-submit the Vitaros NDA to the FDA in the third quarter of 2017), FOLD +3.9% (ticking higher - commences the commercial launch of the precision medicine Galafold in Italy following the final publication of reimbursement guidelines by the Ministry of Health), GNC +3.4% (Chief Innovation Officer disclosed purchase of 29500 shares worth approx $230K), CIA +1.1% (modestly rebounding after issuing statement regarding today's cautious blog post, strongly disagrees with its assumptions and conclusions)

After Hours Losers

Companies trading lower in after hours in reaction to earnings/guidance: TLRD -28.8%, NSYS -12.1% (thinly traded), SPPI -9.6%, WATT -6.9%, HEAR -6.4%, CWH -4.6%, VNET -4.3%, TVIA -3.8% (also TerraVia, Bunge, and BioMar Group expand their distribution agreement for AlgaPrime DHA; 'making the product commercially available at scale to salmon farmers and other participants in the aquaculture industry'), BETR -2.8%, SFS -2.8%

Companies trading lower in after hours in reaction to news: PLNT -3.9% (commences 15 mln common stock offering by selling stockholders), BCRX -3.8% (to sell $45 mln of its common stock in an underwritten public offering), TGTX -3.4% (to offer and sell shares of its common stock in an underwritten public offering), SBGI -1.9% (commences an underwritten public offering of 12.0 million primary shares of Class A common stock)

>>> US Close Dow -0.33% S&P -0.23% Nasdaq +0.06% Russell -0,64%

Closing Market Summary: Crude Oil's Plunge Leads Stock Market Lower On Wednesday

Crude oil ($50.40/bbl) stole the spotlight on Wednesday, plunging 5.3%, after the latest Energy Information Administration (EIA) inventory report showed a much higher build than the consensus estimates were anticipating (8.2 million vs 2.0 million est.). The major averages held their ground for some time amid the energy component's plummet, but succumbed to selling pressure in the final stretch. The Nasdaq (+0.1%) finished with a slim gain while the S&P 500 and the Dow closed with losses of 0.2% and 0.3%, respectively.

Unsurprisingly, the energy sector closed the day at the bottom of the leaderboard with a loss of 2.5%. The rate-sensitive utilities (-1.5%) and real estate (-1.5%) groups also finished solidly lower amid an increase in interest rates following a better than expected ADP National Employment Report, which clobbered consensus estimates; the reading showed that a whopping 298,000 private-sector jobs were added in February (consensus 180,000).

In light of the ADP release, economists will be adjusting their estimates for nonfarm payroll gains (consensus 188,000) in Friday's Employment Situation Report for February, which is regarded as the last potential barrier for a rate hike in March. Following today's economic data, the CME Fed Watch Tool now assigns an implied probability of 90.8% to a March rate hike, up from 81.9% on Tuesday. Furthermore, the market expects to see another rate hike by the September meeting. The U.S. Dollar Index (102.04, +0.23) ticked up in tandem with rate hike expectations, adding 0.2%.

In the same breath, U.S. Treasuries finished the day in negative territory with the benchmark 10-yr yield closing four basis points higher at 2.55%.

At the top of the day's sector standings were the health care (+0.3%) and consumer discretionary (+0.3%) sectors with the latter space receiving a boost from retailers. The SPDR S&P Retail ETF (XRT 42.37, +0.43) added 1.0% after the latest batch of earnings reports, which included a stellar performance from The Children's Place (PLCE 118.15, +18.25). PLCE shares spiked 18.3% after the company reported better than expected earnings and issued upbeat guidance. In addition, The Children's Place also announced a new stock buyback and a dividend increase.

For the health care group, today's positive showing was more of a bounce-back performance following Tuesday's tumble, a day in which the sector saw selling pressure in response to the House Republicans' proposed Obamacare replacement.

The technology (+0.1%), financials (unch), and materials (+0.1%) sectors finished near their flat lines while the telecom services (-0.4%), consumer staples (-0.3%), and industrials (-0.4%) groups finished with modest losses. 

Today's economic data included February ADP Employment Change, fourth quarter Productivity & Unit Labor Costs, January Wholesale Inventories, and the weekly MBA Mortgage Index:

  • The ADP National Employment Report showed an increase of 298,000 in February (consensus 180,000) while the January reading was revised to 261,000 from 246,000.
    • The ADP reading precedes Friday's more influential Employment Situation Report for February, which is widely considered the last potential barrier to a rate hike in March.
  • The unit labor costs were left unrevised during the fourth quarter, showing an increased 1.7%, which was higher than the 1.6% increase that had been anticipated by the consensus. The productivity reading was also left unrevised, showing an increase of 1.3%. The consensus expected an increase of 1.5%.
    • The key takeaway from the report is that productivity is low, with the average annual rate of productivity growth from 2011 to 2016 being 0.6% versus the long-term rate of 2.1% from 1947 to 2016. Low productivity gets in the way of a rising standard of living.
  • January Wholesale Inventories decreased 0.2%, while the consensus expected a downtick of 0.1%. The prior month's reading was left unrevised at +1.0%.
    • The market doesn't typically pay much attention to this release since the full business inventories report is usually released a few days later.
  • The weekly MBA Mortgage Applications Index increased 3.3% to follow last week's 5.8% uptick.

On Thursday, investors will receive February Challenger Job Cuts at 7:30 ET, with February Export/Import Prices and Initial Claims (consensus 240,000) following at 8:30 ET.