Target risk multi-asset funds may be the best way forward for private investors who are focused on their savings, writes Simon Hoffman of Friends First.
Perspective is an interesting thing. When you ask a retail investor what they think an asset manager’s job is, they will invariably say ‘to make money’. If a fund loses money there is little sympathy, as the other perception is that they are extremely well paid – so they should be smart enough to make money.
However, when you talk to an asset manager the conversation is more about running ‘products’ to fulfil ‘mandates’ or to outperform peer groups or indices. It’s almost as if in the most capitalist of industries talk of making money is somehow crass.
PERFORMANCE
A eurozone equity fund manager might run a number of different ‘products’. One might have a large number of holdings and be aiming to beat the FTSE Euro 100 index by 1% a year; another might contain a small number of their ‘best ideas’, but aim to outperform the index by 2% a year. In both cases the asset manager will talk at length of their process, stock selection criteria and risk management.
However, ask them what they will do if they think eurozone equity markets are going to fall, and they will mention being ‘mandated’ to be fully invested. This means they will stay in the markets even if they think it will result in their fund losing money.
This is okay for institutional investors. However, times they are a-changing and the fund management industry has finally woken up to the fact that this approach simply doesn’t work for your typical retail investor.
Retail investors are generally savers rather than investors, and have fairly simple objectives. A typical retail investor will talk about earning more from their investment than they could by leaving their money on deposit.
AT WHAT RISK?
The important question is then not so much ‘how much more?’, but rather ‘at what risk?’ We are all familiar with the concept of risk and return: to get a higher return on our savings we need to take on a higher degree of risk. But there is no point in a retail investor saying that he or she would like to make 10% a year as the risk associated with this would be off the scale. It is more realistic to turn the question on its head by asking: how much of a loss can you tolerate in normal market conditions?
FINDING THE BALANCE
Simon Hoffman, Friends First
If a financial advisor is equipped with the knowledge that their client wants to maximise returns over five to seven years, but understands that investments can go up and down and couldn’t tolerate a loss of any more than 10% in any year, they now have a fair chance of being able to select a fund manager with a ‘product’ that is trying to do exactly this.
We are all familiar with the concept of risk and return: to get a higher return on our savings we need to take on a higher degree of risk
It is likely to be a ‘multi-asset’ fund with a defined risk objective. The fund manager will be given relatively free rein on where to invest, but stricter guidelines as to how much risk they can take on.
The skill of this fund manager might have a little less to do with picking the right stocks, but a lot more to do with managing diversification and how much is invested in different asset classes at different points in the investment cycle.
This manager will not be berated if they didn’t capture all the upside of a bull run, but will have failed if they took on too much risk and their fund took the brunt of falling markets.
NAVIGATIONAL SKILLS
At Friends First we run a series of target risk multi-asset funds – Magnet and Compass. What is interesting to us is that although we offer four different levels of risk, approximately 90% of flows are going into the two lower risk options.
Savers are inherently more focused on capital preservation than maximising returns. By investing in target risk, multi-asset funds you can at least be assured that the fund manager is aligned to these objectives.
They can’t blame ‘the markets’ for losses because there are many different types of investments available with different degrees of risk. Their job is to navigate the fund through different market conditions with the retail investors’ objectives in mind.
