Are Values Funds – Valuable?

The Wall Street Journal has a largely unsurprising (to me) piece comparing the net performance of political, values, or ESG funds (collectively, “Values Funds”) to the indexes they strive to “improve” upon. The ultimate gist – they lag.  Not terribly, but they all tend to drag behind the comparable index funds, particularly when you consider the higher fees associated with them (which can be 3 times higher). But these posts are not about investment advice (which I don’t offer), but compliance. 

So what’s the compliance angle on the WSJ’s reporting? Marketing. Investment managers, plan sponsors, ETF creators, and others need to be careful about how they market an investment vehicle like this that is the subject of so much public analysis and conversation. Here are some thoughts:

Accurately describe what you are trying to achieve and its limitations. Values Funds are just that. While they may ultimately have similarities to index funds and emerged from index funds, that is probably not the best comparison and that distinction should be made clear.

Choose the appropriate benchmark carefully and with supportive evidence. In line with the above comment, if the investment adviser is selecting a different, and presumably more appropriate, benchmark, there needs to be honest internal discussion and clear, although limited, public disclosure about why the benchmark was chosen and what makes it a more accurate comparison. Self-serving benchmarks are an easy trap to fall into.

Disclose performance net of fees as this is a clear part of the story (and the criticism). As shown by recent news stories, performance net of fees is a big (and obvious) part of the story and though it has been a consistent emphasis of the SEC, it is one that should not be forgotten.

Readable disclosures. The idea of readable disclosures may seem obvious, but it is all too easy to let your legal team handle this and end up with disclosures that are accurate, fulsome, but incomprehensible to your reader. Put them in plain english, not legalese. 

Consulting with your compliance team to shape your answers is even more critical now that “pre-clearance” is no longer required. If you need further assistance, reach out to a trusted advisor.