How much do your clients really know about the managed funds they invest in? This is the critical question that all financial planners and fund managers should be addressing.
The market selloff this year has predictably spawned a fresh crop of first-time investors riding the rally of ASX darlings like Afterpay. Many of them will no doubt be holding court in COVID-safe barbeques across Australia, sharing tall tales of their investment wizardry.
Picking up cheap stocks after a correction is nothing new. And when asset prices are on the rise, nobody ever asks why; it is only when they fall that questions are asked. For investors, transparency is often the first casualty of a bull market. Why question the process when values are rising? It is easy to become blinded by good returns.
Focusing too much on performance is risky, particularly over the short-term. When considering managed funds, investors need to know howthe fund was able to achieve returns. Performance should be considered a measure of the fund's commitment to its investment strategy. The best performing fund is not always the right one -it all comes down to identifying an active strategy that suits your investment goals.
Fortunately, there are many tools available to financial planners willing to look beyond headline fees and performance. Many of these tools provide a more technical view of a fund's process and enable you to consider key factors such as fund holdings, style, size, and standard deviation when comparing investment options This level of analysis is important in funds across all asset classes and is essential to providing transparency to investors.
In the case of global equities, we have seen a clear outperformance of growth strategies over value for several years now. However, even within growth funds there are distinct differences to observe. For instance, some funds have achieved outperformance by being overweight the FAANGs (Facebook, Amazon, Apple, Netflix and Google's Alphabet). As you can see from the below chart that position has rewarded investors handsomely.
One trick pony or sustainable strategy?
If this overweight position is the direct result of a fund manager's process and stated objectives, then this would be a clear example of a manager exhibiting skill and discipline.
However, if this overweight position is at odds with previous investment allocations and was made after a series of poor decisions, then investors should be asking the million-dollar question: can this success be repeated?
Catching a lucky break is one thing. Having an investment strategy that delivers consistent returns over the long-term is quite another. Asking pointier questions will ultimately lead towards a better understanding of how the fund is able to perform as it does. This is a far more beneficial and informed position for advisers when it comes to their discussions with clients.
As financial advisers, it is critical that you ensure the managers you work with are open to scrutiny and can give clear and consistent answers to these questions. Challenging them on the strategy of their fund and how its holdings support that strategy are essential if you are to form a true partnership.
How active is your fund manager?
When investors lift the lid on funds, there is one very important function they need to consider: the role of the fund manager. Just how active are these funds that are recommended to clients?
Given the proliferation of cheap, passive products in the market it is important to make sure that your clients are not simply investing into a closet index fund. The recent volatility in markets has clearly demonstrated the value in taking an active approach to portfolio construction. There are a variety of factors that can demonstrate the level of active management in a fund including active share, correlation to index and number of holdings vs benchmark.
We see this type of product knowledge as a key value add that as a fund managerwe can offer our clients. We regularly conduct this type of analysis for a variety of advice practices and licensees who are interested in really understanding what's driving our funds.