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The AFM offers starting points for the proper use of benchmarks

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The Netherlands Authority for the Financial Markets (AFM) is in favour of clear comparison options when presenting returns in order to provide investors with maximum insight into fund performance. Currently, however, the use of a good comparison (benchmark) for providing insight into the performance of a unit trust leaves room for improvement. This is evident from a survey conducted by the AFM among collective investment companies. The AFM therefore provides collective investment companies with several starting points for selecting clear benchmarks, which will make it possible to compare their fund performances in the best possible way.

Investment companies use benchmarks in two ways. Firstly, as a standard for comparing the fund's performance with a similar investment. In addition, it can be used as the basis for (part of) the fee of the fund manager. The AFM considers it important that the benchmark can be compared properly with investments in the fund with which it is being compared. This means that the investment policy of the fund should (largely) correspond to that of the selected benchmark. The benchmark therefore represents the so-called 'investment universe' for the fund manager.

A good benchmark corresponds to the fund in the following respects:

  • the type of instrument in which the investment is made
  • the currency in which the investment is made
  • the area in which the investment is made
  • the sectors in which the investment is made
  • the dependency of the performance of a certain asset (for example a substantial share) in the fund and the benchmark (concentration).

Composite benchmarks, for example consisting of several indices, are a complex way of comparing fund performance. It is important that collective investment companies exercise restraint when using these. It is also important that benchmarks are switched as little as possible. If the benchmark changes regularly, it will become more difficult for investors to assess the performance of the fund over a longer period.

Coefficient

Collective investment companies also have to make it clear whether the fund uses a coefficient (by making use of derivatives or borrowed money). If the fund and the benchmark do not match entirely in these respects, this should be explained clearly to the investors. Collective investment companies can use, for example, the fact sheet with background information on the fund for this purpose.

Incidentally, the Essential Investor Information has to be offered together with all unit trusts that are offered to consumers in the Netherlands. This risk meter is mandatory for most European collective investment companies. The AFM recommends investors to take note of this as well before making an investment decision, in addition to the other information provided by the fund provider. The Association of Stockholders (VEB) has also asked attention for this subject.

The AFM promotes fairness and transparency within financial markets. We are the independent supervisory authority for the savings, lending, investment and insurance markets. The AFM promotes the conscientious provision of financial services to consumers and supervises the honest and efficient operation of the capital markets. Our aim is to improve consumers’ and the business sector’s confidence in the financial markets, both in the Netherlands and abroad. In performing this task the AFM contributes to the prosperity and economic reputation of the Netherlands.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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