As we approach the end of the tax year, it is a busy period for most of our adviser clients. With your time even more precious at this time of the year, we’ll start off with a look at the concept of investing. Forgive us if that sounds too rudimentary, but with all the headlines surrounding the industry regulator’s review and the ‘Sage of Omaha’ joining the bandwagon bashing active managers and championing passive investing, it is worth stripping the argument back to basics and posing a few basic questions.
Q: Why do we save?
A: For retirement, for an event or events in the future.
Q: As an industry, do we make this easy?
A: Probably not.
Q: Should we? (Subject to satisfying the industry regulator)
As an asset management business that is not publicly-quoted and therefore not having to satisfy the semi-annual microscope of broker research and institutional shareholders, we have the interests of investors, not shareholders, at the forefront of our minds. That enables us to adopt a longer-term perspective, strip away the size constraints, inappropriate labels and indices that beset the industry heavyweights to look logically at what investors seek – outcomes not a vast menu of inputs.
A big question for the investor is – who should I entrust my savings to?
For those investing directly, this might mean through a company they are familiar with as they’ve seen their adverts on the side of a taxi or a hoarding at a station – a sort of comfort blanket. Those companies, those with the advertising spend, seek to offer the investor the full spectrum of investor options through asset classes and geographies. Does the individual investor have the knowledge to navigate their way through thousands of products and their differing share classes? Some may but most do not according to the Financial Conduct Authority (FCA).
Many will seek the advice of an Independent Financial Adviser (IFA), preferably one that is truly independent like the majority of our investors, not one of those who have been swallowed-up by a consolidator/asset gatherer where the subsequent client offering isn’t necessarily similar to the one the client originally signed up for.
Investors expect delivery of a solution that their expectations warrant over time. As investment solution providers, we are responsible for meeting investor’s expectations in terms of:
- Wealth Preservation in Real Terms (above inflation)
- Accessibility – it’s their money, they should be able to access it on any working day
- Downside Limitation – by not incurring undue investment risk
NB Who said an index is the appropriate starting point? – as we have said many times before, indices may be useful reference points but they are not portfolio construction tools.
As the chart below shows, passive investing continues to gain favour and the flows into passive investing over active investing are large. Is this a case of buying what’s already gone up? Perhaps also at work here is the seemingly indoctrination by the financial media that you don’t get what you pay for from active managers. Of course that view overlooks the impact of size and that many large-scale asset managers are simply too big.
Source: RMG investment Management
Value for Money
The FCA has struggled with a definition of this. This should mean delivering clients’ investment objectives after all costs. We find it hard to fathom that some investment providers still provide returns in gross terms.
In this one sentence, our definition is simpler than the FCA’s breakdown, which is based mainly on cost plus benchmarks that are largely irrelevant to retail investors. Do individual investors really care about market indices? Are market indices the appropriate starting point for an investor’s investment objectives?
Product or Solution?
To put it another way, the asset management industry generally delivers more questions than answers. The market is awash with product but clients and their advisers desire solutions. The growth in multi-asset funds has attempted to deal with the solution but although their capacity is reasonably large, many have floundered or under-delivered in the past year as asset class correlations rose and opportunities became scarcer.
We appear to be in a world where we question more and more of the news feed, not least surrounding Donald J Trump’s outpourings. We believe the asset management industry is on the cusp of an ‘Emperor’s new clothes’ moment – investors realising that they are buying product from industry heavyweights where asset gathering is the key raison d’etre of those providers, not delivering meaningful investor outcomes. To repeat ourselves, size matters. Not being too big to deliver for your clients is crucial. The industry is fixated on the hindrances that beset the large institutional investor where closet tracking is prevalent. Why the retail investor should be brainwashed with that problem is beyond rationale.
Snap, Crackle & Pop?
Snapchat’s parent Snap Inc’s Initial Public Offering (IPO) at USD17 a share on March 1st raised a few eyebrows when it subsequently soared in trading and was quoted at just over USD27 a share at the time of writing on March 6th. We are not about to discuss the merits of the company yet to make a profit – it may be a success like Facebook or struggle like Twitter after their IPOs in 2012 and 2013 respectively (see table below*), but if you’re a passive NASDAQ index investor you’ll be buying what’s gone up and selling what’s gone down.
Source: IG.com *The table was put together prior to the Snap Inc. IPO. At the time of writing, Snap Inc’s share price had risen 58% and had a valuation of USD34 billion.
Consolidators – aka Asset Gathering
Yesterday morning saw the announcement of a ‘merger’ between Standard Life and Aberdeen Asset Management to create the largest asset management business in the UK and one of the largest in Europe. Following on from last year’s Henderson/Janus tie-up, there is increasingly a desire to scale-up in the face of passive flows. That may be good for shareholders but like the consolidation that continues in the IFA industry, where does that leave the interests of the individual investor? Fortunately, there are a number of truly independent financial advisers remaining and there are some asset managers like T. Bailey Asset Management that put the investor first.
Investors probably have a good idea of why they invest but perhaps the bigger question should be – why invest with an asset gatherer and place themselves behind the shareholder in the importance ranking?
There are smaller, consistent performance seeking asset managers, unconflicted yet delivering understandable inflation related investment solutions while placing the investor at the front of the importance ranking.
Advisers, for the most part, are telling us that their primary skill is in financial planning and more are outsourcing the investment function. If we are to believe the headlines – most of that should go into passives. Really?! Some have opted for the less transparent DFM avenue which appears to be going full circle into unitised vehicles which can be more efficient for the investor.
T. Bailey Asset Management is already offering their best thinking in two identifiable and relevant investment solutions that form the bookends of four risk-rated portfolios. Simple yet effective and with a history of delivering after fees.
7th March 2017