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End Clients and Absolute Accountability

Asset managers are moving away from comparisons with competitors and toward the delivery of returns to the end-client, says Nick Samouilhan, multi-asset manager at Aviva Investors


 

The ultimate clients of every fund manager, the private investors, want to grow their money over time. ToNick-Samouilhan1 this end they put some aside each month and they expect that sum to increase. Not an unreasonable expectation.

But in the past, and, to an extent still today, the industry has not worried enough about whether it has done a good job for these end-clients and has been overly concerned to measure its performance against its rivals.

League Tables

Indeed, a cottage industry grew up in which each fund looked at how its competitor funds have been doing. League tables were drawn up by trade bodies and independent financial advisers, and these became all-important.

The traditional funds – known as “balanced” or “managed risk” funds – proceeded to take on so much risk relative to each other and to generate so much return relative to each other.

In the process, what made sense to those running the funds made increasingly less sense to the end-client. The events of 2008 make up a good example of this. If, say, the average fund lost 18 per cent that year, the fund manager who lost only 15 per cent could say: “I have out-performed, I want a bonus.”

The trouble is that the investor cannot live off, cannot eat or drink, “relative” returns. They do not see any “out-performance”. Instead they see their investment has declined by 15 per cent.

Ignoring Peer Groups

In the wake of all this, there has been a move to ignore the peer groups and to forget about relative returns. Instead, the idea is to take decisions that in an absolute sense will make a difference. That is what “absolute” means in this context – it means something that benefits and makes sense to the end-client.

And once you switch to that approach, it changes everything.

To highlight the difference between the two approaches, let us suppose a fund manager believes that US equities are going to lose money.

An absolute-returns fund would simply not hold them. But a relative-returns fund would note that everybody else held, say, 30 per cent of their funds in US equities. The manager would probably be allowed to go underweight but only to the extent of cutting the holding to 20 per cent or 25 per cent of the fund.

This means the relative-returns fund will know it is going to lose money for clients. This makes no sense from the client’s perspective but complete sense from the fund’s perspective.

Absolute Returns

There is a saying that there are bold pilots and old pilots but no bold, old pilots. Lots of young managers in relative funds are very self-confident but the older ones are not like that, because taking positions against the trend can lose you your job.

Long-serving fund managers tend to make just small deviations from the average, which is what happened in 2007-2008, with poor results for the end-client.

So the industry has started to move to absolute returns. The danger, of course, is that new league tables will be drawn up measuring absolute-return funds against one another. It is vital that these funds ignore such tables and do not get into the habit of talking about their competitors.

Instead, they must talk to both financial advisers and their clients about how they “run money”, how they manage funds. They must make it clear that at times they will be streets behind their competitors and at other times streets ahead.

The offer to the client is not to beat some peer-group benchmark but to deliver real returns – an average of five per cent over a rolling three-year period would be fairly typical at the moment.

Of course absolute-return funds will be compared with each other, but the trick is not to care. Absolute return funds are accountable not to their peers, but to their clients.

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