The Centre for International Finance and Regulation (CIFR) has funded research into 37 active Australian equity funds that compares their stated aims with their daily transactions and monthly equity holdings over 15 years.
The research, conducted by academics Zhe Chen, David Gallagher and Camille Schmidt, used Investment Management Questionnaire (IMQ) responses to gauge the stated aims of fund managers.
IMQs are a requirement of the Financial Services Council for its members and have no legal enforceability, unlike a PDS.
The research examined managers’ compliance in respect of the number of stocks held, tracking error, and asset turnover.
Almost two thirds of Australian equity managers complied with the self-declared number of stocks held in 2000 and later.
But prior to 2000 only 29 per cent of portfolio snapshots complied with the self-declared limits.
“Funds generally have poorer compliance with their self-declared maximum turnover,” said the paper.
Seventy per cent of fund-year observations exceeded the maximum turnover self-declared in IMQ responses.
“Of the three characteristics examined in this study, tracking error is the most systematically underestimated in the responses to the IMQs,” said the paper.
Seventy-five per cent of funds exceeded the self-declared maximum tracking error.
Professor Gallagher, who is chief executive of CIFR, said the study shows investors should view self-declared limits in IMQs as “relative” rather than “absolute” indicators of a manager’s investment process.
