Ten ways to look on the bright side when some things in life are bad
Saturday 31 January 2009
Gloom and doom in the economy? Bah humbug. There are ample grounds for optimism.
When you're chewing on life's gristle, don't grumble, give a whistle, as the Monty Python team tells us.
So says the Australian in December 10 2008. I have recently visited Australia on a fact finding mission to understand how we can improve the services we deliver to our clients. I came across this article, which provides useful advice irrespective of what country you live in.
The global crunch has not only hit your pocket: it has hit the professional money managers hard too. Asset manager Russell Investments suggests many will be striving to protect their reputations and businesses…and hopefully your money!
"Regardless of the market conditions, whether they be calm or volatile, investors should be continually assessing their manager's performance," says Symon Parish, Australasian chief investment officer for asset manager Russell Investments.
How many times I have repeated this message? The answer is a great many times… but here's Russell's 10-point health check for investors to assess their managers to evaluate how well their financial needs are being looked after.
*What is the effect of falling assets under management on a manager's revenue and profitability?
If funds are falling, so is the fee income as asset values shrink by up to 40 per cent and investors withdraw. It means managers may struggle to hold key staff or to keep investing in talented juniors.
*Has the manager lost any big clients?
When a big investment mandate walks -- say, a sum of more than $500 million -- others can get itchy feet too. Firms that rely on niche products that have become unpopular may be especially vulnerable.
* Is the environment too distracting?
In times of crisis, it is important to keep clients informed, which some do through the media, but it can be a big distraction when their eye should be firmly on the ball of stock selection and asset management.
Look for the firms that have separate teams for schmoozing and investing.
* Are they are up to the job?
In a bull market, most managers make good returns, but these levels of turmoil are extraordinary and will test even the best.
Investors need to be confident the investment professionals have the necessary skill, experience and attributes to manage through the turmoil.
* Does the manager's business model rely on performance fees?
Many managers run on a fee-based model, which reward managers for better returns. Hedge funds, for example, can charge a performance fee of 20 per cent of the increase in the net asset value of the fund.
In the slump, high watermarks will be hard to achieve -- perhaps for years -- creating a disincentive for managers to focus on the ongoing performance of the strategy.
* Does the firm carry much balance sheet risk?
In recent years fund managers have developed structured products with an implicit or explicit guarantee of return, which may result in a material contingent liability on the firm's balance sheet.
In this climate a manager could be required to make good on such a guarantee, or the size of the payment could be much larger than has been anticipated.
* Are there risks involved in the manager's ownership structure?
Some managers may be at risk due to the financial health of their parent companies or joint venture partners. Managers whose parents are global financial services firms experiencing distress are particularly susceptible.
* Have there been any signs of capitulation in the manager's investment decisions?
A highly volatile environment has replaced the previous bull market and commodities rally. Check if your manager has capitulated on key portfolio positions or changed its investment processes in response to the current climate. You may not be getting the type of portfolio you once expected and the manager could be at risk of being whipsawed if the market rebounds suddenly.
* Has your manager started cutting staff?
Many money managers are coping with lower asset bases by cutting costs and firing workers, which can be quite unsettling for those left behind, or who are new and still fragile.
Check which staff are being let go and consider how involved they were in producing the investment performance to date.
* What is your manager's product strategy?
Keep an eye out for new products, as many may be relaunches of old ones with poor performance records or lower profitability.
A fund manager may try to expand its range of products to diversify revenue sources. Investors should consider whether new products are a revenue-seeking exercise or a genuine innovation that is properly resourced and positioned to add value for investors.
Launching new products takes time and can divert resources from existing products. Investors should also be on the lookout for products that have had a large withdrawal of support or have simply become too small due to poor performance.
This can leave the manager with a product that isn't really viable but may not be readily shut down. The consequence may be that the product becomes a "legacy" fund and isn't given proper attention by the manager.
Whilst these are worthwhile questions to ask…for managers of your ISAs, investment portfolios and pension funds, the answers you receive do not always get to the truth...hence the best people to ask the questions are independent of your managers. Yes, this something we can help you do.
posted by Murray Round Wealth Management @ 15:06,
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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