The seven-year qualifying schedule of the actuary is more than most people in the City can stomach. ...
The seven-year qualifying schedule of the actuary is more than most people in the City can stomach. It may make you an expert at working out morbidity or mortality tables, but it is clear to me that it does not make you a great investor.
The life industry has for years entrusted your clients" money and my own to a with-profits manager whose primary concern is their asset/liability model rather than what is good for the investor.
In the growth years of the stock market in the 1980s and 1990s, 'smoothing" was used by the life companies to bank some of the excess growth and keep it to one side to reward investors in bad years when investment returns were below expectations.
At first glance, most people would agree that this sounds like a sensible and prudent strategy. However, if you set your reversionary bonus rate too high and you then enter the most severe bear market that most people can remember, your asset/liability model tends to go off the rails. Remember how you and your clients felt this time last year.
Shell-shocked after three years of down markets, the sensible fund managers in the investment management industry were lightening their allocation to bonds and starting to buy quality equities again at rock bottom prices. The bond market was coming to the end of a 10-year bull run and the equity market was ripe for the stock pickers.
Now, even my seven-year-old daughter knows that you buy low and sell high, so how do you explain the fact that most with-profit funds stumbled into the recent three-year bear market with their highest allocation to equities only to sell these equities at the bottom of the market? Not only did they sell at the bottom but they subsequently bought bonds at the top of the market, just before the interest cycle started to edge up again.
The stock market is up approximately 35% from its lows and much of this rise will have been completely missed. Why? Because the actuaries have to move their with-profits funds into more cautious assets to protect their liabilities.
And so the new buzz phrase in the life company world is 'market value adjustment". Which, in layman"s speak, is 'Oop"s we"ve got it wrong, can we have some of our money back?". So not only have your clients had their with-profits funds mis-managed for years, their fund valuations are not worth the paper they are written on.
Just think of a world in which an investor could access a fund, which invests in equities, bonds and cash. A world which has a professional manager whose first priority is to maintain and grow capital through a balanced approached based on fundamental investing.
A world where a client can receive a daily transparent valuation of what their investment is actually worth and where the vagaries of MVAs, high commission levels and poor performance do not exist.
Well, this world already exists. It is called the cautious managed sector and is populated by some fund managers who would I am sure be a welcome addition to your clients" pension and investment plans. Your challenge will be to select the best one.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation