In the new world of complex risk-based solutions, it is easy to forget the virtues of the good old-fashioned managed fund. Alasdair McHugh, Baillie Gifford product specialist, multi-asset, takes us back.
Given the challenge of writing something insightful (and interesting) about investment, it is tempting to wax lyrical about the big issues of the day: the withdrawal of quantitative easing (QE) in the United States, sovereign debt crises and Chinese growth.
However, it is perhaps more honest, if somewhat uncomfortable, to admit we have no great insights to offer on any of these. We do not believe that we can second guess central bank policies or that we can, with any certainty, predict the direction of the next macroeconomic data release.
What we do believe in, however, is the value that can be created by keeping things simple.
It is easy to forget the virtues of the good old-fashioned managed fund
We believe the good old managed fund is as relevant today as it was when it was all the rage some 20 years ago. As Coco Chanel famously said: “fashion changes, style remains”.
Today we are besieged by risk-based solutions offering expected outcomes tailored to clients’ expectations and attitudes to risk. It is what the Financial Conduct Authority (FCA) wants – a label for each investment. Asset managers favour these funds because they can be packaged and given trendy marketing tags such as Consensus, MyFolio and Episode. They may well work but, based as they are on back-tested data, we will not know until things get tricky – which they will at some stage.
Post-Retail Distribution Review (RDR), much has been made of advisers outsourcing investment to third parties. However, solutions – whether they are risk-based or simply managed – are really in sourced options.
Asset managers are expecting to gather large chunks of advised money – in many cases, all the funds under management an adviser might want to invest. This level of trust demands a partnership approach not caveat emptor. We must work with advisers to keep them and their clients informed. So, the simpler the better.
Most balanced or managed funds bring bonds, cash and equities together hoping for market plus returns with lower volatility.
Considering our well-advertised equity bias, our approach to investment is to simply select quality growth companies to hold in a reasonably diversified portfolio and then to hold those companies long enough to allow their – hopefully – good operational fundamentals to shine through and lead to rising share prices. Perhaps this reliance on equities for returns is too risky for some but then de-risking carries the risk of little or no returns.
For the purposes of our research, we break the world up into five equity regions, along with government and corporate bonds.
Our regional equity teams and fixed income department construct ‘building block’ portfolios composed of the investments they are most enthused about. We then combine these building blocks, with the freedom to make ‘asset allocation’ calls (that is favouring one region over another, or equities over bonds, etc).
We realise this does not sound like rocket science but we make no apology for that.
This simplicity is, oddly, now quite a radical approach. The world of fund management has a habit of promoting ever more complexity, hence the rise of risk metrics that require a doctorate in physics to understand but might not actually measure real risks.
Successful investment is not easy. Warren Buffett famously avoids buying anything he does not understand. Hopefully, managed funds will continue to stack up well on this basis, as a simple solution to a complex problem.
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