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Investors' Opinions of Managed Funds Investment Statements. Occasional paper no.1 Author Michael Wydeveld [1999] NZSecCom 2 (1 July 1999)

Last Updated: 2 November 2014

Investors' Opinions of Managed Funds Investment Statements

OCCASIONAL PAPER 1#

By Michael Wydeveld

July 1999

The writer is an economist with the New Zealand Securities Commission. The views presented herein are the writer's own and do not necessarily reflect those of the Securities Commission or its Members. The survey methodology and questionnaire were prepared in consultation with the Investment Savings and Insurance Association. Their help was much appreciated.

Introduction

Initial disclosure to New Zealand investors occurs through an investment statement1. The purpose of the investment statement is to provide key information that is likely to assist a prudent but non-expert investor to decide whether or not to invest2.

The form in which the key information is presented to prospective investors requires issuers to answer a set of questions. The questions that must be answered in an investment statement are:3

What sort of investment is this?
Who is involved in providing it for me?
How much do I pay?
What are the charges?
What returns will I get?
What are my risks?
Can the investment be altered?
How do I cash in my investment?
Who do I contact with enquiries about my investment?
Is there anyone to whom I can complain if I have problems with the investment?
What other information can I obtain about this investment?

There is evidence that around 43% of New Zealanders believe that managed funds are so complicated that they are suitable only for the expert investor4. This seems a rather high percentage and begs the question:

Are issuers preparing investment statements that are easy to understand and useful to investors?

To answer this question we surveyed investors' opinions of investment statements used for unit trusts, group investment funds and retail superannuation schemes5. The survey methodology and questionnaire design were developed in consultation with the Investment Savings and Insurance Association. Appendix 1 contains the questionnaire used for the survey.

The methodology adopted required the co-operation of issuers, who attached the questionnaire and reply paid envelopes to the investment statements they distributed. Each questionnaire had a reference number so the responses could be matched to the investment statement to which it pertains. This methodology had the added advantage of capturing not only investors who had decided to invest, but also those who did not invest.

There were 14 funds management companies who agreed to participate in the survey6. In total 34 investment statements for unit trusts, group investment funds and retail superannuation schemes were initially covered by this survey, although two investment statements were removed from the market by issuers during the course of the survey. The time frame for the survey was 3 months. Surveys were distributed to issuers in early April 1999. Results were tabulated as at 5 July 1999.

Results

Presented below are the findings of the survey. The findings include some initial observations on the structure of the investment statements surveyed; combined results on how investors rated the understandability and usefulness of the investment statements; specific written comments by investors; data on the time investors spent reading investment statements; the use of professional advice; and numbers on those who ultimately invested having read the investment statement.

Structure of investment statements

There were 28 investment statements that offered a number of products in the one document (e.g., several unit trusts together, unit trusts with superannuation funds, etc). These documents are referred to subsequently as "combined offers". There were 6 investment statements that offered a single product.

The lengthiest investment statement had 39 pages, while the shortest investment statement had 8 pages. Both were for combined offers. The investment statement for a combined offer had on average 20 pages, while a single product investment statement had on average 14 pages7.

Twelve investment statements devoted all their pages to answering the required questions. On average 83% of pages were devoted to answering the required questions. The investment statement with the least number of pages devoted to answering the required questions, devoted only 28% of its pages to these questions.

Of those investment statements providing additional information, this information appeared to be:

• Useful information that was appropriately dealt with as a separate issue in the investment statement. Additional information of this sort was more likely for investment statements of combined offers, some including a useful section on "choosing the right product", or
• Useful information that could have been better integrated within the framework of required questions, or
• Detailed information that could have been better placed in the prospectus, or
• Repetitious information,8 or
• Promotional material.

Combined results

In total 55 responses were received. The responses received were sufficient to generate average scores for 13 of the 32 investment statements remaining in the survey9. Only investment statements that generated at least three responses are included in these final results.

For each investment statement respondents were asked to rate on a scale from 1 to 5 the answers given to the required questions. The answers were rated on how understandable and how useful they were, where 1 represented "very useful" or "easy to understand" and 5 presented "of no use at all" or "difficult to understand". The individual responses were then averaged to come up with a set of results for each of the 13 investment statements. These sets of results are available only to the issuers of these investment statements.

The combined results of the 13 investment statements are presented in the Table 1 below. The results were generally positive, although the answers were generally seen as easier to understand, than they were useful. It seems plausible that the understandability of an answer acts as a constraint on the perceived usefulness of that answer. The logic being that an answer that cannot be readily understood is also less useful10.

Table 1

The ranges of average results for the 13 investment statements are shown in Table 2. Some investment statements scored close to top points on both how understandable and useful the answers were. Others ended up with results that were decidedly average.

Table 2

Written comments

A number of investors stated that they were satisfied with the investment statements they received. Other specific comments received from investors included:

• First impression was that document was complex, but upon reading found information explained in a simple way.
• The answers could be more easily worded.
• Some questions and their answers were of no interest.
• The investment statement provided a lot of issues, but little guidance on which product to choose and how the investment should be used.
• The length of the document could be reduced because of repetition.
• Concise aspect of investment statement supported over detailed prospectus.
• Prospectus providing more detailed information appreciated.
• Charts were an understandable and useful means through which to provide information.
• On occasion answers given to different questions seemed to contradict each other.
• The issuer clarifying verbally aspects of the investment statement was appreciated.

From the written comments there does appear to be a demand, in the case of combined offers of managed funds, that issuers answer a question in the form: How do I work out which product is the right one for me? Issuers may wish to consider whether they can formulate an understandable and useful answer to such a question. The answer could provide guidance on how the individual products relate to investors' personal circumstances.

Time spent reading

There were 32% of respondents who indicated they spent an hour reading the investment statement, 30% spent 30 minutes, 22% spent 15 minutes and 16% spent two hours.

It is possible that the usefulness of an answer reflects not only the issuer's ability to provide relevant information, but the possibility that there are questions that investors are just not interested in. Table 3 reveals the percentage of the respondents who read the answer to the particular question. These figures suggest that all the current required questions are of interest to investors.

Table 3

Use of professional advice

There were 54% of respondents who indicated they had sought professional advice regarding their investment decision11. It appears that a few of these advisers use the investment statement as a guide around which to structure discussions with clients.

Those who invested

There was a high proportion of investors who felt satisfied enough to invest after reading the investment statement, with 90% indicating they had decided to invest. In contrast there were only 2% of respondents, who indicated that they would not invest after reading the investment statement, while 8% were undecided on whether they would invest.

Conclusion

Are issuers preparing investment statements that are easy to understand and useful to investors?

Our results indicate that the investment statements for managed funds have been generally well received by investors. Investment statements for managed funds are largely given above average marks by investor on how understandable and useful the answers to the required questions were.

However, there is still room for improvement. Investors most frequently queried the quality of the answers given to the questions:

• What are my charges?
• What returns will I get?
• What are my risks?

High proportions of investors are willing to invest in a managed fund after reading the investment statement. This suggests that, if the high percentage of New Zealanders believing managed funds to be suitable only for expert investors persists, there must be other factors, besides the investment statement, to explain these perceptions. A lack of general education on managed funds may be such a factor.

Appendix 1

The Questionnaire

Investors' Questionnaire

This questionnaire accompanies the Investment Statement of a savings product you are being invited to invest in. We are interested in your opinion of this Investment Statement. Investment Statement Information

The Securities Regulations 1983 set out the questions to be answered in an Investment Statement. We would like to know how understandable you found the answers and how useful they were to you in deciding whether or not to invest. Please circle the number on the scale that reflects your opinion. If you did not read the answer to the question tick the box and go to the next question.

Please provide any other comments you wish to make in the space below.

Footnotes

1. A prospectus must be made available within 5 working days to investors upon their request. The prospectus is intended to provide more detailed and technical information than an investment statement.
2. Section 38D (a), Securities Act 1978.
3. Schedule 3D of the Securities Regulations 1983.
4. Debra Hall, Research Solution Ltd, Good Returns, January 1999. It is possible that a number of New Zealanders included in Research Solution's survey have no experience with an investment statement. However, this should not invalidate the question being asked of whether issuers are preparing understandable and useful investment statements. Answering this question may rule out the investment statement as an explanation, should the high percentage of New Zealanders believing managed funds to be suitable only for expert investors persist.
5. Retail superannuation schemes are superannuation schemes offered to the general public. These schemes, therefore, would generally not include employer sponsored (contributory) schemes.
6. We invited 14 of the largest funds managers to participate in our survey. The participating companies were AMP, ANZ, Armstrong Jones, ASB Bank, BNZ, BT (NZ), Colonial First State, National Mutual, NZ Guardian Trust, NZ Funds Management, Public Trust, Royal & Sun Alliance, Tower and WestpacTrust. The Securities Commission would like to thank all the participants in the survey, including investors who took the time to complete the questionnaire.
7. The type setting and number of pictures used in these documents varied considerably. No estimation of the density of these documents was attempted.
8. No assessment was made of the necessity for repetition. It is a question for issuers to determine what repetition is necessary, while remaining compliant with the law.
9. The investment statements included in the survey were the primary offer documents associated with approximately 80% of New Zealanders funds in unit trusts, group investment funds, and retail superannuation. This suggests that our results, although responses appearing limited, do cover a significant proportion of the market.
10. This relationship is less likely to hold for answers with detailed technical analysis. Given that the investment statement is intended for the prudent but non-expert investor, it seems unlikely that there should be a significant amount of technical analysis.
11. We did not define "professional advice". It is possible that the professional advice may have come from independent advisers, tied advisers, or even sales staff.