Putting on the shoes of the salesman can help you understand their motives…
Saturday 22 November 2008
There were 10 tips issued by Robert Jenkins, chairman of the Investment Management Association, in the FT on October 19.
His comments are made to the asset management industry. You can link to the article at the FT here or download a copy here. When reading, try to look at the tips and think about how they impact on you, the end user!
He suggests if fund managers themselves don’t understand what they are buying…don’t sell it to your customers. I agree but this implies they have been doing exactly that to date! He goes on to say “Read the prospectus and read the fine print. If you cannot explain it to your mother in a way she can understand, reconsider the proposition.”
In the same way as fund managers are recommended to read the fine print, investors need to do the same. Ask yourself if you understand what you are buying? Are you sure who is doing the recommending (or selling) knows as well?
He continues “The packaging should be appropriate to the product. Think hard about including illiquid assets in open-ended funds. Moreover, remember that what starts out as a liquid asset can become illiquid if circumstances change. And beware substitute investment products. Investment banks are creating and distributing structured investment products aimed at the retail investor. Deceptively simple in sales pitch but complex in construction, they carry issuer risk, liquidity risk, and a level of cost that may not be apparent.”
The words used, sales pitch are a little off putting, but actually honest. The fund managers want to sell their funds. As the end user, you may not be buying what they think they are buying so ask questions. One other point, structured products are aimed at retail investors…that is you. I have already commented on structured products in previous blogs and you really need to know what you are buying…remembering that the sales pitch is likely to be attractive to you! The words 'marry in haste and repent in leisure' provide a good analogy to think about whilst reviewing whether these types of investments are suitable to you.
Number 6 in his list says “If in doubt, do not launch. It is human nature that we lose our heads at the top and our nerve at the bottom. Client demand often peaks at the peak. Fund managers are human and we cannot be expected to know when top or bottom has been reached. Nevertheless, there are times when our experience calls for caution. Risking one’s long established reputation for the sake of short-term asset gathering is a bad bet.”
Human nature will want to buy investments when markets are bullish. It’s a feel good factor, and asset managers know investors are unfortunately often misguided by their emotions. Ever wondered how many funds are launched year after year but how often do you hear about the failed funds…what happens to them?
…once again understand the risks you are taking.
One final point, this may sound like don’t buy any investments, but the right investments will make a significant difference to your wealth over time. The key is getting it right. Our role is to help investors make good decisions. By being transparent, investors can really start to understand why capital markets work over time.
posted by Murray Round Wealth Management @ 11:29,
Picking winners is practically impossible
Friday 21 November 2008
Finding the investment product provider, the right fund, the right fund managers are all difficult jobs for any investor. “Retail investors should invest in some sort of index tracker, because even among funds that outperform, the chance of picking the wrong fund is high, according to research by Cass Business School.” Says the FT
The article went on to say "This reveals the funds that have outperformed through skill rather than good luck, or that underperformed through lack of skill rather than bad luck." Should you be investing on the basis of luck! The article continues…."The research found that over half (57 per cent) of funds that look like star performers turn out not to be"
The point of this research is to question your thinking and to help you question those advising you. There is not a computer model that has the answers, but there is ample evidence that suggests using active management, which is generally more expensive, is unlikely to provide you with the returns you expect compared to trackers or indices based investments. So base your decisions on relative probabilities. Is it likely you will benefit more from actively managed funds or more passive based options?
posted by Murray Round Wealth Management @ 11:26,
Wealth Management is focused on achieving your goals...too many asset managers call themselves wealth managers
Wednesday 19 November 2008
In a regular review meeting with a client, 90% of the time was spent not discussing investments..is that unusual?
This is an interesting point because most prospective clients have a preconception about what we do, but only really find out how we help them achieve their objectives when they experience our service proposition.
Wealth management seeks to understand your goals and then helps to design a strategy to achieve them. It means understanding your needs, your aspirations, your views, your propensity towards risk, in fact, it means really getting to know you properly. Only then can we act with you to help you achieve all that is important to you.
posted by Murray Round Wealth Management @ 11:28,
We all know what active managers do, don't we?
Tuesday 18 November 2008
I often talk about active management on the basis that investors have a clear understanding of what that means… firstly here’s the glossary.
Active management does work. The fund manager or stockbroker, picking and choosing the right investments at the right time, does work. You can look at any league tables and they will show how some manager somewhere has outperformed passive management.
The issue is how do you find and pick that fund manager in advance? What processes do you use to know which manager will be the next star!
That is difficult.
What fund managers, on a year by year basis, have consistently outperformed everyone else? Do you know any?
It is not like picking the winners from professional sports, such as golfers and tennis players. If you are in the top 10 in the world in these sports you stand a good chance of consistently winning. The key word here is consistently.
Unless you have a sure fire way of picking the right funds, the right shares, the right fund managers in advance, consistently, why take those risks?
But you may say that’s why you use an adviser to pick these active managers for you. It sounds plausible doesn’t it, but ask yourself this question. If a fund manager spends 100% of his or her time trying to outperform the market, how can an adviser, who spends significantly less than 100% of their time looking at which funds and managers to choose from, know which of those managers is the right one?
posted by Murray Round Wealth Management @ 11:27,
Shock horror…more proof that indices do better than managers
Monday 17 November 2008
... you don't have to be Hercule Poirot to prove it!
Standard & Poors is the world's foremost provider of independent credit ratings, indices, risk ...were reported in a small section of the FT, providing new evidence that active managers struggle to outperform their benchmarks over any extended period of time.
The conclusions are not new, but they are often little promoted. Active fund managers, which most investors employ (not necessarily on purpose but often by default because they have not been explained properly what they are buying) do not want to promote the fact they are not out performing the market indices over time.
If investors are not given good information, does that mean they need to be Hercule Poirots, seeking out the smallest of clues to solve financial mysteries! Hopefully not, but a questioning attitude or carrying out your own due diligence will certainly help.
The FT went on to say "Standard & Poor's Index Services has relaunched its Spiva scorecard, which compares the performance of US mutual funds and benchmark indices. Using data corrected for survivorship bias, the scorecard shows the benchmarks outperformed the managers in at least 70 per cent of cases in almost all categories"
What happened in the remaining 30%? How many active managers will persuade you, as investors, that they are different and fall within the 30% band. Statistically that cannot be true, but investors will find it difficult, unless they have the skills of Hercule Poirot, to know whether they are actually beating the indices or not.
If you do not have adequate information and knowledge to make a decision, just start using probability. Ask yourself if 70% is a bigger number than 30%? If so, might it be worthwhile 'betting' with the 70% rather than taking a chance on the 30%?
Still not too sure…well according to research by Cass Business School, Retail investors should invest in some sort of index tracker, because even among funds that outperform, the chance of picking the wrong fund is high. Hmmm more evidence and I feel another blog coming on.
posted by Murray Round Wealth Management @ 11:24,
Banks…hate them or love them..we still need them!
Sunday 16 November 2008
I want to be kind to the banks, yet their primary activity to act as a payment agent for customers and to borrow and lend money has gone somewhat astray. This means, we as consumers need to keep the banks at arms length. We need them for some things, but not for others.
As you will know the world's governments have been providing capital for the banks. Perhaps at some stage in the future, governments will want an exit strategy by offering the shares to investors. In the meantime, the banks will want to build their capital base. That means they need money and that money comes from all of us. Higher rates to borrow; lower rates on savings; hidden margins on investments. Investors will need to be much more diligent when dealing with banks.
It is important to understand what service you want from your bank, but say no to anything you do not understand. Want an example? Here's a starter for 10! Structured products.
What are structured products. Take a look at the link and then come back to the blog.
The banks sell structured products to investors. These products often look attractive to consumers as they are marketed well. The advantages appear to be all with the consumer yet they are not transparent - which meansas investors you do not know what the bank really makes from these products. If a bank is selling these products, they will not do so unless they are profitable to the bank. The question is how profitable? Who is more likely to do well from buying these products, the investor or the bank? When an investor starts to delve a bit deeper to find out more about these types of investments, you might find the risks are greater than you may have envisaged. In fact, the recent market downturn has highlighted the downside risks.
In the FT on November 16. Steve Johnson writes "Didier Pitton, product marketing director of Odyssey Financial Technologies, which provides front and middle-office solutions to the financial sector, said Private banks "did not explain the downside risk and many clients have been forced to take delivery of stocks that had lost 30-50 per cent. The client advisers themselves sometimes did not understand the risks," said Mr Pitton, whose company services more than 200 financial institutions in more than 30 countries, including 15 of Europe's 25 largest banks."
Perhaps a word of warning here then….
In another article at the FT investors have discovered that a number of retail structured products which offer a return linked to an index with "guaranteed" capital protection have only been as safe as the company providing the guarantee.
"Buyers of the more than 1,000 structured products issued by Lehman Brothers found themselves facing losses following the bank's liquidation, and the prices of exchange traded products issued or guaranteed by other investment banks dropped sharply on concerns over creditworthiness. Many of Merrill Lynch's "ELDeRs" structured products had the now-rescued Bradford & Bingley as one of their counterparties, while products from Close Investments were based on bonds from the collapsed Icelandic bank Glitnir."
My point is that investors should think very carefully before undertaking these types of investments. If you as investor do not understand the risks, why invest your money? Keep it simple. Invest into things you understand.
Over the next few years savers and investors will need to be much more diligent with their money and a little less trusting of their banks. Caveat emptor!
posted by Murray Round Wealth Management @ 11:16,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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