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Funds Management

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The old and often used adage that you can lead a horse to water but you cannot make it drink can be easily applied to the world of investment management.

Companies can create all kinds of products and offers for the market, yet unless investors are able to understand a product, are aware of its existence, have an appetite for the brand and also the core offer the product itself (not to mention a whole host of other subtle nuances and variables) then little can be expected in terms of asset allocation.

This report looks to examine the likely adoption and take-up rates of certain types of products and investment structure available in the market but that may not be widely used or appreciated by the majority of investors at this point in time.

The purpose for embarking on this project is to attempt to examine what the future growth and product development situation might be for the UK funds industry in non-traditional areas of investing.

The financial crisis turned the concept of diversification on its head. Asset classes previously thought to be uncorrelated began performing in the same manner, leaving investors perplexed and confused.

A simple mix of equities, bonds and cash (which our research found is what the majority of investor portfolios contain) have done nothing to insulate from the recent (and arguably on-going) shocks affecting markets.

Now, with the future of stable markets once again hanging in the balance, investors, whose world has been rocked so deeply in recent times, may want to consider re-thinking their portfolio construction, as well as investment appetite and tolerance to other unconventional asset classes, which could offer some protection in a crisis situation.

What do asset managers need to do to convince investors and even financial advisers that traditional asset classes are not necessarily the answer to generating stable and sustainable returns over a long period of time?

Not that there is anything wrong with plain vanilla products. There is definitely a place for straightforward equity funds or simple bond funds. However, experience and market data has shown that these products alone are not sufficient to produce a well-diversified portfolio of investments.

Although fund managers and other financial experts alike have spoken about the benefits of diversification, often ad nauseum, it seems that the message has not yet hammered home.  The issue is not a lack of robust product, but rather a lack of understanding and knowledge.

The way an asset management company markets, positions or even simply names a financial product can have a profound effect on investor perception of said product.

Investors often consider alternative investments to be automatically risky, as other research conducted by CoreData has found.

They also tend to place any financial instruments they do not understand into the ‘risky’ category. It is therefore up to financial advisers and investment consultants to help educate the investing public that this is not necessarily the case.

There are some so-called alternative products that seek to reduce risk while aiming to generate returns that are uncorrelated to the equity and bond markets, for example.

And although the onus may seem to be with the financial adviser, it is also the fund manager’s role to help the advising community understand their product, the benefits and the potential pitfalls and assist them in passing that message on to their clients.

On a European level, the Alternative Investment Fund Managers’ Directive is promising to increase consumer protection around alternatives. The aim is to create a European stamp of approval for alternative funds, thus giving investors more peace of mind.

But this will not work without increased education. Investors will still be expected to go into a product with their eyes wide open and have a clear understanding of what levels of risk the alternative fund they invest in has.

And, especially when it comes to retail investors, alternative does not need to mean a tremendously esoteric investment, rather it is simply something they do not currently invest in which can help diversify their portfolio and provide some form of buffer should the worst happen.

• Bank Backlash
  In Australia, every time there is an interest rate announcement from the Reserve Bank of Australia (RBA), there is an inevitable backlash against the banks for raising their interest rates above the RBA’s increase, not passing on the full RBA cut, or like what happened in early February … […]
• Cashing Out?
  For the past four years Australians have been world class cash hoarders, adding  almost $50 billion a year since 2007 – almost half of which has flowed into the balance sheets of Australia’s big two banks, CBA and Westpac. Cash still remains the most attractive asset class in … […]
• Skills Shortage
  This year, the news pages have been dominated by redundancy announcements, which may lead one to conclude that there’s a big pool of talent out there just waiting to be hired. But the latest unemployment figures from the Australian Bureau of Statistics (ABS) tell a different story. Australia’s … […]