JM Finn's Brian Tora Has Finally Lost His Gilt Complex
Investors these days have a much wider choice of asset classes than when I first started out in the investment business. Back in the mid 1960s, the existence of the Exchange Control Act made investing overseas an expensive option. Unit trusts, as open ended investment companies were then known, were only just beginning to attract attention, and the only sensible fixed interest investment available to private investors was British government securities – or gilts.
In essence, portfolios could only realistically comprise domestic equities, gilts and cash – in sterling, of course. Contrast that with the plethora of asset classes and sub classes available today.
Why, even the basic asset classes have become more complex in their variety. Instead of just UK equities, these days you can choose large, mid or small cap; value or growth rated companies. And that’s before you venture abroad, where markets are subdivided into developed, emerging and frontier, let alone worrying about market capitalisation or the nature of the underlying business.
The situation is complicated still further by the massive expansion of the derivatives market, with futures and options and all manner of products using such instruments to control risk or enhance return. It can make it difficult for some advisers to properly understand the nature of the products available, while the poor clients themselves are at an even greater disadvantage.
My Word, My Bonds
Nor does it stop there. Fixed income has become even more complicated, with ratings agencies classifying bonds in a variety of categories, from positively blue chip to sub investment grade – or junk as these bonds are more popularly known. Then there are the index linked varieties, not to mention zero coupon offerings. And bonds can be sovereign or corporate or even somewhere in between. They can be emerging and developed and the styles of management of bond funds vary greatly, too.
And once you move outside these two traditional investment classes, you enter a world that simply did not exist when I started out. Agriculture, infrastructure, hedge funds and structured products are all new opportunities for the wily investor. Even property and commodities have moved on apace, with funds granting access to these classes to even modest investors, when once they would have been the province of the seriously wealthy.
So Are We Really Better Off?
The $64,000 question is this, of course. Are investors really better off with this modern cornucopia of choices?
Unsurprisingly, that’s an impossible question to answer in any meaningful sense. The world has moved on, and greater technical capabilities together with the globalisation of business have meant that opportunities now exist that were simply not possible half a century ago.
Not all of these opportunities have turned out for the better of the investing public, as various calamities in such areas as split level investment trusts and structured products bear witness.
The theory, of course, is that such a wide range of choices allows portfolios to be constructed that more accurately reflect the wishes of the underlying investor. And that risk control should also be simpler.
The Reversionary Trend
In theory, aggregating asset classes that are not expected to correlate with each other in performance terms should be an advantage – but, at times of severe financial stress, even this little comfort can’t be guaranteed. In the financial storm that followed the collapse of Lehman Brothers, almost every asset class fell together, reflecting the collapse of confidence in the financial system.
And yet markets did, of course, survive, and investors found themselves back on a more or less even keel after not too many months. Long term reversion in practice.
So there you have the perennial problem that cannot be solved by simply widening the available choice. Financial markets have an emotional quality that leads to overreaction – in both directions. Markets always rise too far and fall too low, creating euphoria and panic – and also opportunity, of course.
My advice remains that investors should never buy anything they do not understand, and always to remember that investment is for the longer term.
Brian Tora is an associate with investment managers, JM Finn & Co