FT Adviser Event – Diversifying Your Clients’ Investments
On Friday I attended an event at the FT offices titled Diversifying Your Clients’ Investments. The description of the event included how diversification is key to building an effective and balanced investment portfolio and how the popularity of multi-asset funds has blossomed post RDR. This all sounded great to me, and I was also expecting to be faced by a wide range of product providers talking about their diversification strategies and latest funds etc etc.
Well, to some extent it was exactly what I expected. There were representatives from Defaqto, Lighthouse and Invesco Perpetual (who were the sponsors behind the event).
Patrick Norwood, Insight Analyst from Defaqto, gave an overview of the multi-asset sector, some of the types of funds that are available and some of the advantages and disadvantages of these. This was very much a top level view. Although all that I really took from this was that “there is a multi-asset fund available to suit every type of investor”.
The main talks for the day were from Ian Trevers and David Millar from Invesco Perpetual, and Andy Gadd from Lighthouse Group PLC.
Ian and David pitched the new Global Targeted Returns Fund from Invesco Perpetual. This is a new fund launched this year which aims to achieve a gross return of 5% p.a. above UK 3 month LIBOR, through capital growth and income, in all market conditions over a rolling 3 year period. The key selling point (and differentiator) of the fund is that through diversification they aim to achieve this return with less than half the volatility of global equities – diversification is key! Which is something I wholeheartedly agree with.
Unfortunately for investors, as this is a new fund launch there is no track record to evidence past performance and as this is a niche fund sector this isn’t a recognised benchmark to track performance against. There are also high charges associated with this fund, 5% on entry and 1.1% p.a. going forward.
This is effectively a fund of funds with an underlying portfolio of 24 assets, and is actively managed. As well as investing into other funds, the fund manager will also use foreign exchange and derivatives to achieve diversification and returns.
Looking past the headline “5% gross return with less than half the volatility of global equities”, this fund is extremely complicated for advisers to fully understand, and nigh on impossible to fully explain to clients.
This takes me nicely on to the talk from Andy Gadd who is the Head of Research at Lighthouse. He was asked to talk about due diligence, in particular the issue of how much due diligence advisers are expected to conduct on multi-asset funds. According to the FCA, advisers must fully understand an investment before they recommend it to their client. They should also be aware of how funds are managed, and be able to clearly evidence their due diligence process and understanding of the investment. As an adviser, you should be able to stand up in front of the FCA and evidence that you fully understand any/all investments that you are recommending.
Thinking back about the Invesco fund. After reading fund literature and sitting through presentations from the fund manager, I understand the concept of the fund and what it’s trying to achieve. But digging deeper (as would be done as part of even basic due diligence) it is extremely hard to understand all of the underlying investments that the fund is investing into. For example, some of the current underlying assets include:
- Volatility HSCEI
- Rates US vs EU forward start
- Rates EUR long dated forward steepener
- Credit European Flattener
How is an adviser expected to have “whole of market understanding” when the fund universe is flooded with fund of funds that contain underlying assets such as these?
A simple Solution
As you know, we are big advocates of ETFs and tracker funds here at Intelligent Partnership. They give investors the purest exposure to the underlying indexes, are very transparent and have very low costs, some as low as 0.2-0.3% p.a. And because they are liquid, cheap and extremely flexible, investors can build a diversified investment portfolio of ETFs with a moderate investment portfolio.
For more information on low-cost investment solutions through the use of ETFs and index tracker funds, please contact us or check out the range of articles and videos we have on our website.
All the best,
Luke