"Do you think every type of investment must fail before people trust it?" asked the chairman of the improbably-sized investment company Prandeamus Asset Management when I visited his office this week.
"Wouldn't that then make Prandos the most trusted fund management business on the planet?" I replied, which was cruel but clearly hard to resist.
"Yeah, yeah - I saw that one coming even before you walked through the door," said the chairman good-naturedly. "But I'm serious, do you reckon all investment products or asset classes must fail in some way - through a scandal or a crash or whatever - before the wider market is really prepared to take a punt with their own cash?"
"It's an interesting question," I said, playing for time. "Why do you ask? Have you finally started wondering why people are shying away from your Diversified Unusual Debt fund? Aside from the potentially highly prophetic name of course." "Yes," sighed the chairman. "We've had better acronyms. But I'm relatively comfortable with why people aren't buying into that one - yet."
"Really?" I said, raising an eyebrow. "Sure," the chairman nodded. "It's full of rubbish - collateralised loan obligations and covenant-lite loans and all that scary stuff people don't understand and only turn to at specific points in the market cycle when they're desperate and can't help themselves. We keep a couple of those funds constantly open because, with investor fads, it's all about ‘time in' not ‘timing'."
"I thought that was meant to be about time in not timing markets," I said. "I suppose that works too," the chairman conceded. "You mentioned how punters don't understand how all those scary assets like CLOs and ‘cov-lite' debt work," I said. "Does that mean you've finally found a fund manager, who does?" "Oh good grief no," the chairman laughed.
"Do you know how much the ones who do understand cost these days? Come to think of it, how can I even be sure I've employed someone who does understand?" "But should you be marketing a fund if the person running it does not understand how the underlying assets work?" I asked. "Why not?" shrugged the chairman. "I don't understand how the huge widescreen telly on my office wall works, do I?"
"Now that is a pretty iffy argument at the best of times," I said. "But I'm beginning to sense we have wandered off the point. Something has given you pause for thought - and, if it is not the hideous unsuitability of one of your funds for all but the most unhinged investor and the associated prospect of a misselling scandal, I'm intrigued to know what that might have been."
"It was a Professional Adviser article I read on the limited appetite for peer-to-peer lending so far shown by financial advisers," came the unexpected reply. "It got me thinking that - aside from the lack of familiarity and meaningful information on which to turn one's due-diligence guns - another issue might be this is a sector that appears ripe for a stumble and advisers will feel a lot more comfortable after that happens."
"I think you might be onto something there," I nodded. "Obviously there have been some horror stories from the Chinese P2P market and a scandal or two in the US but I agree we have yet to experience anything in this country that might help to weed out some of the more too-good-to-be-true-elements you have to think do exist within the sector.
"Really, in effect, you are talking about a ‘phoenix from the flames' moment from which the surviving providers would emerge stronger and more reliable … ‘what doesn't kill us makes us more investable', so to speak. You've certainly seen that happen with markets such as personal pensions and equity release, I suppose, while with others, such as split capital trusts, not a great deal actually survived the fire.
"The flaw in your argument would be the passive investment sector, which has never really had that sort of reckoning and yet money continues to pour towards it." "Ah," said the chairman pointing towards his giant TV screen. "I have a different theory on that." "Chairmovision?" I checked. "How exciting - although that does make this a To Be Continued …"
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