A review of investment funds’ disclosure of their portfolio holdings finds that fund managers need to do a better job of providing transparency about their portfolios.
In a staff notice published Thursday, the Ontario Securities Commission (OSC) reports the results of its targeted review of portfolio holdings and related disclosure filed by investment funds.
Between August 2011 and June 2012, OSC staff reviewed portfolio disclosure of a sample of investment funds in their annual and interim management reports of fund performance (MRFPs), fund facts documents, and statements of investment portfolio. It reviewed disclosure from a sample of 203 investment funds managed by 40 different fund managers, including managers of mutual funds, exchange-traded funds, closed-end funds, flow-through limited partnerships, and labour sponsored funds.
The regulator says that its review found that the portfolio disclosure, “can be improved to provide more meaningful information to investors about the composition of the portfolio and how the fund’s investments align with the investment objectives set out in the fund’s prospectus.”
Specifically, it found funds that used portfolio categories that did not reflect the unique characteristics of the fund that is set out in its investment objectives; inconsistencies in the categories used across a fund’s different disclosure documents; and, the use of broad, generic categories instead of more discrete, specific categories that would provide more meaningful information on portfolio composition.
The OSC indicates that it sent comment letters to all 40 fund managers regarding 120 of the 203 funds it reviewed. None of the funds were required to refile or restate any disclosure documents as a result of the review. However, a third of them committed to improve the portfolio listing in their financial statements; 36% are to improve portfolio categorization in their MRFP; and, 26% will improve the categorization of the investment mix in their fund facts documents.
“Useful, relevant disclosure is critical to maintaining and strengthening investor confidence and efficient capital markets,” the OSC says in its notice. “Disclosure of a fund’s investment portfolio provides key information to investors in assessing consistency and performance against the fund’s stated investment objectives and strategies.”
The OSC stresses that the categorization of a fund’s portfolio should be directly connected to the specific asset classes and unique characteristics of the funds set out in its investment objectives. Each of the disclosure documents (fund facts, MRFP and financial statements) should be considered independent of each other and provide investors with meaningful information to assess how closely the investment objectives of the fund are being implemented over time, it notes.