Most don't read the company prospectus, but it's important

Photo / Dean Purcell

If you have ever invested in a fixed interest investment such as a corporate bond or finance company debenture you should have seen a prospectus.

But if you didn't actually read it from cover to cover you aren't alone.

One of the biggest criticisms made by the Capital Markets Development Taskforce of prospectuses is that people don't understand what they are investing in because they don't read them.

With an average length of more than 60 pages perhaps it's no surprise people don't have the patience to wade through the material.

The Ministry of Economic Development yesterday closed its consultation on the Securities Act review which includes revising prospectuses to make them easier for retail investors to understand.

Tower head of retail Roger Perry, whose job involves analysing prospectuses, admits they are not easy to read for the average person.

"You need some accounting knowledge to look at the numbers and some legal knowledge because it is also a legal document."

When it comes to managed funds such as KiwiSaver there is also an investment statement which is supposed to be a simplified document which explains the investment in layman's terms.

The investment statement has been around since 1997 but Perry says the general feeling today is that it isn't doing what it was set up to do.

"It has got clogged up with a lot of marketing material designed to promote the fund, so it doesn't really give a fair representation of what you are investing in."

Then because it is still a legal document the rest of it can be filled with legalese. "Ones that are designed well can be understood but because there is no standard it's not easy to read them all and compare them."

The investment statement is designed so that retail investors never have to go to the prospectus but when it comes to debt securities the main way to get information is through a prospectus.

Perry says typically debt investors tend to be more regular investors but the prospectus can be hard to read for the average person because it was designed at a time when most investors were professional investors.

It is also a legally binding document that must stand up in a court of law.

Perry says finance company debenture prospectuses were made even harder to analyse because there wasn't any easy way to compare the offers. From February this year all non-bank deposit takers have to have a rating undertaken by an independent firm.

But there is still nothing to make other debt offers have a rating. Last week Greenstone Energy released its bond offer without a rating.

Perry says without that it may mean some investors decide not to put their money in because they don't have enough information.

"Many will have a rule - you don't invest in unrated securities."

Not having an independent rating is a red-flag which should trigger the question why not?

Perry says it may be the company behind the offer feels it has a strong enough brand not to need a rating or it could be because it is quite risky.

Investors should also think about how easy the document is for them to understand.

"If the statement is so complex or has language you don't understand don't invest in it or go to someone to explain it."

Investors also need to understand the fees involved the risk of not getting their money back.

The first thing he looks for is who is making the offer. "Is it someone I know and can rely on?"

Looking at the accounts can also give clues. Perry says if it is a managed fund that has a small amount of money in it investors should ask whether the provider will keep it going.

The risk page can be a good place to look but bare in mind there will be a mixture of generic and specific risks to that investments. "The main questions people should ask is what is the volatility and does it match what I am comfortable with and am I going to get my money back?"

What is a prospectus?
A legal document detailing an investment offer. It could be offering a debt security like a corporate bond or finance company debenture or a managed fund like KiwiSaver.

What should it contain?
* Who is making the offer
* What the offer is
* What the terms of the offer are
* Its likely return
* Its potential risks
* The legal structure