Today's smaller investors demand the same treatment offered to the market's big players
Double or quits? Big excitement as year-end inflows into Isas doubled but disappointment on the realisation the total is half what it was last year. One week the stock market shoots up and the next it plummets. According to the sages who have survived the past 20 years in Japan, this is what the beginning of a long running bear market looks like. In that period, there have been no less than five rallies of more than 25% of the key index and as many drops of similar proportion.
How do you know when to buy shares or funds? Chartists are on tenterhooks for the FTSE to break through its 200-day moving average, supposed to be a screaming buy signal. Does it matter that through 90 of those 200 days, half the world has been on a war footing? Others are scrutinising directors' dealings, which at the moment are not indicating huge confidence. But opinion polls say the financial community is far more optimistic than it was two months ago.
Cash weightings among institutional investors are not particularly high. Perhaps it is the atmosphere of restraint following the investment banking disgraces on Wall Street but anything new, fast, bright or cutting edge is right out of favour. Only recently, any credible asset manager had to have an aggressively rigid style and process. Increasingly, compromise is desirable. Incremental is the new black.
Perhaps this is why there is a flurry of enhanced indexation products on offer. Big pension funds in the US have long appreciated the merit of being neither active nor passive but UK consultants have often taken a dim view of such fence-sitters. Unsurprisingly, index tracking became highly popular through the bull market. Now clients are rather interested in strategies promising more effective risk budgeting.
Research from Goldman Sachs shows that by shifting a proportion of the passive allocation of a portfolio to enhanced indexation or structured products, overall performance improves. The investor takes just a little more risk through a range of carefully monitored strategies, for extra return that would otherwise have been forfeited. In the current environment, making passive money work harder sounds appealing.
Structured products for retail investors are a minefield of complexity, spiked with deadly fees. Institutional investors don't stand for that kind of nonsense. There is no possibility of charging active-type fees for a closet index tracker and hoping it will go unnoticed. The standard package now has a core fee reflective of a passively run portfolio plus a performance fee capped at an agreed level to rule out undue risk-taking.
Why this sensible and equitable arrangement cannot extend to retail investors is a mystery, or perhaps a conspiracy. Allocations from institutional investors are pooled, as they would be for retail clients. There are more investors to service but that is what technology is for. The minimum investment is greater but the overall fund size is similar. Indeed, fund managers insist there is no correlation between fund size and performance, as there is with many long-only products.
While the fundamental, quantitative or technical investment strategies deployed by asset managers may be beyond the real understanding of the ordinarily intelligent investor, product structure is not. Those private investors left in the market are a whole lot more demanding. They see no good reason why big money should get a better deal and, increasingly, the regulators and watchdogs agree with them. While we wait for the next bull market, a review of product structure and fees might be useful. But... no hurry, there is plenty of time.
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From June 2019