Past Performance is no Guarantee…..

Last week Bestinvest announced that there had been a significant rise in the number of “dog funds” with nearly one in six of fund managers regarded as underperforming. As an adviser you are increasingly faced with the image of an irate client hanging on to several badly behaved fund managers that started life as the friendly little opportunity you originally sold them. Article Here

The number of funds in the kennel is significant not only in monetary terms but as a measure of the investment management industry and the environment in which now we find ourselves. The fact that the number of funds has increased so much suggests that there are increasingly common failings in the industry.

What you would expect in a “normal” situation is a rotation of managers through the annual “dog kennel” title. Someone has to be bottom of the pile, but if they are equipped to do their job it might be a reflection of the economic cycle rather than their own failings. Think of Halle Berry picking up her “Rassie” after her Oscar success. Similarly, there was also a trend for picking the “Dow Dogs” as a means of securing future performance because they would ultimately come back in to the spotlight of growth.

Last week we also came across another article by Mark Soonaye of Octopus Investments, suggesting a re-think regarding the reference to past performance as a means of sound asset allocation. Article Here

The fact that an increasing number of managers are getting caught in the cross fire and their successes are more fleeting in nature means that you can’t afford to let the market run its course relying on your fund selection to gather value as a result of nothing more than a general growth trend.

We all know that in the future, growth across the world in all asset classes will be sporadic and possibly simply because a reducing amount of unleveraged investment capital will be chasing these gains.

Faced with the fact that professional managers are struggling, what are your options?

There is no doubt that being positioned in the correct asset class, market or sector is the first and most important factor in gathering value for your clients. Each sector will still have its “dog(s)” that will haunt the individual manager’s performance. However, the ability for the adviser to take a broader view may present an opportunity to insulate or counter balance your client’s exposure to the performance of a specific fund or manager.

At the same time the Retail Distribution Review is presenting a major ground shift in the industry where the role of the adviser is coming in to focus. Your client has always relied on the recommendations that you make to guide their portfolio through to retirement or maturity. The difference now is that the accountability driven by the adviser’s fee structure is no longer in doubt.

You work for the client to manage the investment manager.

For even the most adventurous of investors we believe the emphasis will turn to gathering available gains and preserving capital at all times. The question we keep asking is do you have the tools at hand to do this for your client? This may involve outsourcing functions and operations but will not absolve you from the results that they achieve for your client.

It looks like you will be drawn in to making more dynamic recommendations in the short to medium term and will need to access real time information to evaluate your chosen investment solutions. It sounds like Octopus Investments have a handle on the process but how much cost can you layer on to the client portfolio alongside your own fees?

Achieving Results For Your Clients

Achieving results for your clients depends on the following factors in the order that you as an adviser might most influence them:

  • Effective risk profiling;
  • Sound tax planning;
  • Cost control; and
  • Securing appropriate investment performance

Points three and four are part of the process and cannot be ignored. Through our weekly reports we provide an overview of the most relevant market trends that you might consider in the process of establishing and maintaining your client portfolios.

It is all very well that you establish an appropriate review process with your client based on a long term and general asset allocation framework. However, evaluating the performance of the asset allocation selection that your client will follow is vital.

We don’t believe that you can engage with your client without being able to discuss current market trends and the outlook for asset classes, markets and sectors. The decision to act will always be the domain of the client but the assurance that they take from your meeting will be vital to your relationship.

Accepting that past performance is increasingly less likely to assure future performance and that nobody has a crystal ball, the challenge is to fill the void between the past and your point of recommending an investment or asset allocation strategy with an approach to assessing market performance that is at least consistent and might help your client focus on capital preservation with a prospect of growth.

To understand more about our how our weekly trend analysis builds up in to a quarterly market profile have a look through our website, we have Blog articles and Tweets that highlight the importance of the Adviser role in closing the gap between client objectives and investment manager services.

Keith Reid
Keith Reid
Keith’s training as an accountant and auditor has emphasized the importance of evidence in all good decision making process. The ability to monitor management processes effectively is a key to making the most of business opportunities. Both Keith and Gerry believe that this priority for capital preservation is the common principle that sets the framework for any sound investment strategy or business model.