Thanks to our global client base we have the opportunity to meet advisers and institutional investors with a very varied mix of underlying client types. Some live in countries that have a very well-established investment culture and others are more nascent. Regardless of which environment our end users are used to, the allure of investing on your own, without professional help, is always present. Different geographies have very different ‘mood music’ from an investor risk perspective: it is interesting to see clients in one country have a particular preference in terms of risk and investment outcome whereas their neighbours across a border can have a very different stance. The same goes for the idea of investing globally versus keeping capital in one’s home market. For some there is a temptation to invest with companies they see every day whereas for others the allure of global behemoths is too great to ignore.
It is interesting to see clients in one country have a particular preference in terms of risk and investment outcome whereas their neighbours across a border can have a very different stance.
Some clients are keen to invest directly in companies whereas others prefer to invest in funds managed by firms on their behalf. There is a huge amount of variety in terms of different client needs and the fact that investors are happy to follow their instincts is understandable but also risks creating very imbalanced portfolios. I think part of the reason why, is that a lot of clients with capital are either successful businesspeople or are interested in business and so they are not daunted by the prospect of putting money at risk especially with companies that they are familiar with.
Investments as a profession has done a poor job of demonstrating our collective usefulness over and above a Do It Yourself (DIY) approach. Most legal matters are quickly passed onto a solicitor, accountants handle all but the simplest tax jobs and while most of us could have a go at amputating our own limb, few of us would think it worth the risk. For these other professions the benefits of qualifications, training, experience and resources are either self-evident, indoctrinated, or we are all so petrified of the adverse consequences of a botched DIY job that we leave it to the experts.
Yet the pitfalls for the unwary in the sphere of investments are huge and despite those risks the allure of DIY is often too great to ignore. But even in the relatively prosaic world of long only investing in funds you can be lulled into a false sense of security. In fact, choosing fund managers is a very difficult job indeed. There are tens of thousands of funds available worldwide – multiples of the number of large cap stocks available to equity investors and, amongst their ranks, there are some total duds. Whether that be due to inappropriate fees, misleading labelling, questionable liquidity or insufficient oversight, there are myriad ways to end up out of pocket even before the movements of the markets are taken into account. Additionally, although thankfully rare these days, there is also from time to time outright fraud especially in less well-regulated corners of the markets.
In order to look past labels, understand philosophy, risk controls, culture and so on a combination of quantitative and qualitative research is essential. Getting to know a portfolio well ahead of investing by analysing the holdings through time to identify stylistic, sector and regional exposures is essential. Portfolio concentration, turnover, active share etc also provide important insights into a fund manager’s modus operandi. Only once we have run the holdings through our systems will we undertake detailed (and repeated) manager due diligence meetings. We run the agenda and we only consider investing once we are confident that this is the fund for us. We get access to these managers and any that don’t pass muster are quickly put aside. This level of research and insight is essential and that is why we believe a DIY approach to fund selection is a risky business indeed. We believe that detailed research, experience and insight is essential to have the best chance of achieving our clients’ investment outcomes.