Investment Research and fund Selection

As an advisory firm ourselves we take a number of precautions when carrying out research on existing investments and take care when selecting investments firms for clients, we carry out a great deal of due diligence – either directly or via trusted third parties. This has avoided any embarrassment from having our clients getting involved with a number of fund houses who made glittering promises but were essentially a pack of cards waiting for the wind. To name but a few Key Data and Arch Cru investments.

However this in depth research has on occasion delivered an unexpected response. Now many, many years ago I saw a potential client who had been advised to transfer his pensions to Equitable Life, I carried out the initial research for him at no cost and informed him that in my opinion he was making a mistake as my research indicated that Equitable Life were “technically bankrupt”. To this day I remember the client bursting out laughing and saying “Mr Best – if you think a firm the size of Equitable Life could go bankrupt, then I will say good day to you sir!”.

That was the last I saw of that potential client, although I have always remembered the incident, which occurred two years before the collapse and well publicised financial demise of Equitable Life became public, so I thought I had done a pretty good job.

Like many IFA practices you have to undertake many hours or days research but as the clients often see us just for a few hours they are often unaware of the amount of time we take or the work involved in extracting information from some of the insurance companies.

These queries often arise as a result of receiving a projection of pension benefits, these are often inaccurate, we check every projection using a very accurate calculator. Not only are the projections out but often the stated “facts” are wrongly stated.

It is essential to obtain an accurate understanding of the existing investment before proceeding with advice.

What else do we do, well we avoid the use of structured products, which often carry additional charges and additional risks. The complexity of some of their structures is often beyond my understanding, so how on earth can a client fully comprehend the risks they are taking on! In addition you can be locked in for a set investment period of say five to seven years, not a good idea in this rapidly changing market, where pockets of opportunity may occur, how can you profit from these if your monies are locked in, leaving you paying a financial penalty to leave early.

We do like absolute return funds, they differ in performance however, so take care.

We are now part of the way through an investment bear market, seasoned investment professionals now say that the investment markets are now at a sensible level. Maybe, but that does not mean that the stock markets will not drop any further!

A key defence for any investor is to diversify your investments, however often clients do not fully understand how to and often diversify in an unintended almost laughable and comic manner – so a client who had 100% of his monies in a FTSE100 tracker fund then moved bits and pieces around so he ended up with 97% in a FTSE 100 tracker fund.

Another client showed me five different pension pots with five different companies but all had identical funds!

I understand that many clients have been persuaded and opted for portfolios comprised of passive funds, these are mainly linked to stock market indices, you need to take care which of these passive funds you select, as charges of them vary. Not only do the charges vary but often they fail to properly track the market indices they are supposed to mirror and have tracking errors.

I wonder however if selecting a range of tracking funds is a sensible way forward. We are about to go through a period of considerable technological and economic change. It has been forecast that up to 65% of the companies currently trading on the stock market will not be able to keep up with the pace of technical advance and competition from global companies who do not pay their full share of tax. That is an awful lot of companies and this is likely to have a significant investment impact – these companies will go to the wall or get taken over. So having your investments in an index fund which represents a broad range of investment funds may not be the answer.

Selecting a range of defensive funds and funds with top stock pickers is likely to have far more chance of investment success. The difficulty is that fund managers move around,and when they leave a fund house, the story given out by the fund house is always the same “the fund is run on a team basis and so we do not believe the performance will be affected”. Well rats to that!

We prefer to follow top performing fund managers rather than funds, the likelihood is that if they were running an investment team before at their fund house their management of the fund would have been constrained by the mandates of the fund house. So one of the reasons fund managers leave to set up “shop” on their own is so they can now exercise their skills in a more unconstrained way.  We make a point of following the manager and have recently identified a number of excellent fund managers who have established new funds that are likely to do well.