At Graham Rich’s PortfolioConstruction Forum Conference in Sydney last week, Adjunct Professor of Economics at the UTS Business School, Jack Gray, suggested facetiously that you’ll never hear an active fund manager say it’s a bad time to be an active fund manager. Jonathan Ramsey, co-founder and director of InvestSense, says if the evidence is to be believed, there are frequently bad times to be an active manager, and “several decades of data suggest that we have overpromised and under delivered” to investors.
“The most complex and intermediated products – multi-managers and industry funds – are just as mediocre as each other, and un-engaging in their own way,” Ramsay says.
“People are voting with their feet and moving towards SMSFs, robo-advice, residential units, passive investments.”
Ramsay (pictured) says the question of why fund managers regularly fail to add value is puzzling, given that “it is an industry populated by qualified, talented and often creative people”, and why they consistently fail to educate clients better is just as deep a mystery.
When this underperformance is overlaid with the propensity of retail investors to make badly timed and often poorly informed decisions, the cumulative effect on portfolios can be devastating.
Need to ‘educate’ clients
“Misinformed and scared investors take our mundane, slightly expensive products, with their propensity for gentle wealth erosion, and turn them into a financial wrecking ball,” Ramsay says.
“If we accept that incremental, year-in, year-out, alpha is an incredibly rare, though much overpromised, commodity, then perhaps we can think about what else we can and should promise.
“Is there something more than the empty promise of outperformance? Something other than alpha that is more important to the consumer?”
Ramsay says one such thing might be a better understanding of why fund managers do what they do, so consumers can better understand what’s happening to their money, and why. The industry discounts the opportunity to educate retail investors at its own peril.
“As an industry, many scoff at the potential to engage and educate retail investors,” he says.
“But we often use Maple-Brown Abbott as a counter example. Maple-Brown Abbot, during the dot-com boom*, is a case study in the power of engagement to effect better outcomes. Taking the time to clearly communicate ahead of time what they were doing meant that they suffered fewer withdrawals than many value managers in the lead-up to the dot-com crash. As clients understood what they were doing they blamed the market and not the manager.”
More engaged investors
Ramsay says there are two clear and tangible benefits to having more engaged investors.
“The manager gets more latitude to effectively deploy the strategy… and, if successful, performance is ultimately better,” he says.
“And the client is less likely to switch out of the strategy too, at the wrong time. Investors have been rewarded handsomely on both counts on several occasions.”
InvestSense is challenging fund mangers to think in a different way about how they define strategies and articulate them to investors. And to focus attention on the issue, the research firm is hosting an “ideas factory” event in October, at which a hand-picked line-up of fund managers will be challenged to produce a 10-minute pitch to an expert panel, with financial planners invited to be in the audience to hear and vote on the best ideas presented on the day.
Ramsay says the best ideas on the day are likely to be not just those that appear to have investment merit, but those that also are likely to resonate with investors.
“Past performance is likely to be absolutely immaterial as keeping investors engaged during tough times is more important than enticing them on day one,” he says.
“The industry has always had that last part covered, which may have been part of the problem.”
In coming days InvestSense will release details on the fund manager selection process, the composition of the expert panel, and how financial planners can be in the audience to hear the managers pitch their ideas. Professional Planner will cover the event and report on the results.
* This article was edited in the eleventh paragraph on 31/8/16 to change “GFC” to “dot-com boom”.
