Comment and opinion for retail investors in the UK
I have been thinking for a while that the relative underperformance of the UK stock market, compared to other global investment destinations like the USA, means it is somewhere I would want to put money once the ‘indecision’ risks relating to Brexit are out of the way.
I understand that rather silly TV series with zombies featured are in vogue with a younger generation at the moment.
My readers may not know that this term can be applied to companies – those that continue to trade in spite of having steadily reducing profits (or even losses) and unsustainably high levels of debt. In other words, a simple adverse change like a change in interest rates, or even unusual weather conditions (for a retailer) could see them fold. They are surviving in spite of all the evidence suggesting they should not still be here, never mind being a good destination for investment.
However, incredible though it may seem, you will find shares in such companies being bought by fund managers – often managers who already own the shares. They seem to be so close to the company that they believe the directors over optimistic plans and on occasions disingenuous explanations about what is going wrong.
They could of course be hoping for a ‘recovery’ play or a takeover. But if the company is in a real mess, only an idiot would take it over and then the combined entity will have trouble (remember Lloyds and HBOS?).
I like it when the fund manager I am researching is cynical about directors’ reports and shareholder presentations. I like it especially if the manager has accountancy qualifications or personal experience in other real world trading businesses as an owner. There are some great fund managers who are also farmers!
Even the most well known fund managers get fooled by a well dressed zombie. The test of their credibility is how quickly they find out and exit the position.
They will take a loss and perhaps a knock to their ego, but if they insist on defending a poor decision and the company eventually folds, the damage for their fund’s investors will be that much worse.
I have now added a ‘How to’ article covering the key points on what is a subject where a very wide discussion is possible! I make a cross reference to one other useful resource for those who want to dig further, but as usual, I have tried to deal with the issue in such a way that you will get a general idea of the main considerations, but will not be instantly bamboozled!
As ever feedback is welcome. Subscribers can request more specific research, of course.
This fund is one I have been familiar with for some years, in fact since it launched in 2008. It has had the same fund manager throughout. He is an India specialist with obvious credentials but the fund has not done well relative to its benchmark over the last 2 years after great results in 2016. Most of the damage has been in the last 12 months. I commented on Indian funds in mid 2018, but newer subscribers may not see those posts and other readers may like an update. People tend to focus on the funds in their portfolios with the largest negative numbers!
A former client of mine from my time working as an investment adviser recently asked me what I thought about multi asset funds. By multi asset she meant funds that hold a range of asset types (often as low cost ETFs which can be traded almost instantly at low cost) and mix them up according to a stated objective which is usually specified in terms of risk and expected return.
They had been presented to her as a better option than a selection of specific individual asset allocated funds in market sectors, on the basis that the manager of a multi asset fund can change the asset mix much faster than an IFA can because the IFA has to go through all the hoops of making recommendations and getting client approval. Even an investor who runs their own asset mix and looks at their portfolio every day can’t trade as fast as a city institution, and probably has less information. The advice this investor had received even suggested that IFA’s are not really capable of advising clients what to do when there are sudden changes in markets. That comment came from the client’s own IFA!
It is undeniable that a multi asset fund manager could quickly take money out of a market really quickly and move to cash or another type of asset if the fund prospectus and objectives allow that: investors need to know exactly what multi asset means for the fund they have in mind as it is not a narrow term and is open to interpretation. But even assuming a fund is recommended with absolute flexibility and manager discretion, some questions arise about the alleged advantages.
The suggestion that trading in and out of the market on the basis of short term news flow or analyst predictions would make you more money is largely discredited. Even if it does work, how do you know that the manager of your multi asset fund is any good at it? The evidence of returns from multi asset funds that seek to lower risk (absolute return funds) is that the managers in the main are in fact not at all good at it – I have written about that previously.
Furthermore, a single multi asset fund will have an objective that is decided by the people who want to market it – not your needs as an investor. A portfolio you build yourself or which is set up by a competent investment adviser will be designed to meet your risk requirements, cash flow needs and interest in the subject and typically won’t need to be quickly re-organised because of ups and downs in the stock market cycle – the existence of the cycle will be assumed and built into the portfolio design.
It is often true that the fees for multi asset funds are higher than for sector specific funds. OK, you may say, because they are managing the assets actively. If that is true, why are you paying an adviser if they have “out sourced’ this task because they don’t have the relevant expertise? You are paying twice. Would you go to the hairdresser and pay once to be told what style you need and then pay again in full for the actual haircut? Maybe some people would but at least they would appreciate what they are doing.
There is arguably a role, in my opinion, for ‘funds of funds’ which are slightly different. Here a manager picks funds or shares/ETFs with a specific focus where perhaps you or an IFA can’t access the whole market because it is too specialist or esoteric . I have invested in ethical multi manager funds myself, accepting the slightly higher fees. To date, as I maybe should have expected, the multi holding selections of the specialist have not really done any better than my own narrower researched funds mix.