Quite often a fund house decides to take on the mantle of offering something ‘new’, it draws in loads of assets and its peers promptly jump on the bandwagon.
What happens then is that as more and more ‘me too’ products emerge, all the offerings begin to look quite similar, the performance subsequently may or may not stack up, appetite wanes, investors start to pull their money out, and ultimately clients are left wondering what went wrong.
I’m thinking the ‘too good to be true’ structured products, 130/30 funds that very few marketed successfully, their successors – absolute return (or other such long/short funds), cautious managed portfolios that were deemed not actually that cautious (or well managed) or property funds that were sitting pretty and heavily weighted in cash.
I generalise hugely to make a point, of course…
What will be the next Holy Grail?
James Montier sits in GMO’s asset allocation team, previously was co-head of global strategy at Soc Gen and is seen by many as the modern-day published godfather of behavioural investing.
A recent paper by Montier suggested that people are always looking for the Holy Grail of investing – strategies that generate consistently good returns and don’t have major drawdowns.
He makes a comparison to the S&P over 20 years, measured against a 'mystery fund', to present that 'dream chart’ – the one where the line goes from bottom left to top right with very little if no variation, the likes of which most of us haven’t seen in a real setting since GSCE maths.
It transpires that this ‘mystery fund’ was indeed the promise made by one such Bernard Madoff with Montier concluding that if something looks too good to be true, it probably is.
The latest fad to which GMO’s guru refers to is that of smart beta. He says smart beta equals simply “dumb beta (arguably, ‘normal’ beta) plus smart marketing”. Basically this is a passive proposition, with an active overlay of sorts that seems to be trying to be all things to all people.
Collective responsibility
In an environment that is calling for evermore transparency is there is risk of murkier water on the horizon?
With the onus on product providers to ensure absolute understanding by the end client buying their products, therefore requiring product literature to be ‘dumbed down’ to the extent that it might not actually reflect the products it is supporting, it makes me nervous.
Will products start to be designed even more so by marketing departments of fund groups because they can more easily fulfil that communication requirement, rather than actually delivering the correct outcome in line with the investors’ objectives over time?
The whole industry seems to be moving away from caveat emptor and in trying to humanise certain aspects of the industry to ensure understanding, perhaps it’s ignoring the fundamental issue which is that the product is perhaps not suitable in the first place – to be bought or indeed to be recommended.
Yes, literature should be clear and befitting of the product to which it relates, but the adviser has a certain responsibility to up their own game in order to ensure their clients understand what they are telling them rather than blame faulty literature in the event of a mis-selling claim. The client ultimately needs to be honest about their level of understanding and ask, re-ask and ask again until they are clear on their possible up and downsides. Workmen and tools spring to mind.
If the RDR’s intent was to ‘clean up’ the industry of product and provider bias, raise standards and quality of advice and encourage more people towards saving more for their futures, surely the onus is shared – the right products, communicated in the right way, by the right people, for the right audience – rather than masking over levels of complexity with slick packaging or accessible shop windows.
