Guidelines for handling past performance in the merger of investment funds
At its meeting of September 11th, 2000, the Board of the Swedish Investment Funds Association adopted the following guidelines for handling past performance in connection with the merger of investment funds, applicable as of January 1st, 2001. The guidelines were revised on June 4th, 2004.
Investment funds can be formed either through the formation by the merger’s component funds of a new fund, or through the absorption (incorporation) of one fund into another fund. The following principles should serve as guidelines in both cases. The term “new fund” refers in the following text to a newly created fund or one that “lives on”.
Investment policy – the deciding factor
The Swedish Investment Funds Act assume that the merger (fusion) of investment funds will only be possible if the investment policy and the rules of the funds in question are similar in character.
Representativeness
In the event of a merger of investment funds, the underlying principle shall always be that the presentation of the “new fund’s” past performance shall be representative of the fund. Consideration shall be given to the age, size and management organisation of the funds to be merged. Factors such as different management organisations, different valuation principles and different sizes may suggest that one of the funds included in the merger might not be suitable.
In cases where the past performance of none of the funds would be representative of the “new fund”, no past performance should be taken over by the “new fund”.
Weighted past performance
In instances where two or more investment funds are to merge, and where the past performance of any of the funds would be representative of the “new fund” if, for example, the funds had had the same management organisation for a long time, the past performances of the funds should be weighted in accordance with the guidelines overleaf.
Information requirements
The past performance of the fund(s) that is (are) not to be taken over must be available. In its annual report and six-month report, inter alia, the fund management company shall state that a merger has taken place and explain clearly how the choice of past performance was made at the time of the merger.
Formulae for weighting of past performance of funds
rCt = Total assets At-1
Total assets At-1 + Total assets Bt-1 *rtA +
Total assets Bt-1
Total assets At-1+Total assets Bt-1 *rtB
Where:
Assets At-1 = The total assets of fund A on the previous day.
rAt = The percentage change in fund A’s asset value, including reinvested dividend since the previous day.
rCt = The percentage yield since the previous day for the weighted past performance. These variables are then linked together into an index series in the normal manner.
…*(1+rCt-2)*(1+rCt-1)*(1+rCt) etc.
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