Performance Reporting Ethics in Asset Management
ABC Asset Management has developed a performance report for its new mutual fund, Growth Fund I. The report highlights a 12% annualized return over the past three years, positioning it well against the benchmark, which returned 10% during the same period. The firm’s management claims the performance is attributable to active stock selection and a strategic asset allocation. However, a wealth management consultant recently pointed out that the report does not include information on whether the reported performance is net or gross of fees and other applicable expenses.
Moreover, the firm recently changed its method for calculating performance metrics, switching from time-weighted returns to money-weighted returns, without disclosing this change in the report. As you assess this situation, address the following:
- Evaluate the compliance of ABC Asset Management’s performance reporting against the standards set forth in the Asset Manager Code.
- Discuss the ethical implications of not disclosing the fee structure and the change in performance calculation methodology.