It never ceases to amaze me, after 25 years in this industry, how vague the majority of fund objectives are. “Aims to achieve capital growth from investment in UK equities” is the stated objective of a highly regarded fund. “To maximise total return while generating a high income” is the explicit aim of another. These are helpful if one is somehow confused as to whether one is buying a mutual fund, a car or groceries.
But if one is trying to plan or save for a future expense, then these objectives are of limited use. For starters, one has little idea what to expect. Will the UK equity market double, treble or halve? Over what time period? How does that help anyone plan for the known quantity of paying school fees, daughters’ weddings or an income in retirement? On top of that, what is being offered relative to the asset class when one is committing hard earned cash?
The fund industry as a whole should always be trying to help investors understand what they are being offered, what it costs and what they can expect in return. It is this last point in particular that I wish to address in more detail.
The fund management industry could help itself and, more importantly its customers, by offering more tangible outcomes from its funds. Not only should they make it easier for investors to identify suitable funds to meet their needs, they will also create an expectation from/of investors who in turn should be delighted if and when these objectives are met.
I accept that an absolute objective is virtually impossible to offer on a traditional long-only fund. However, a clear relative objective, expressed against a benchmark index, with a relative or outperformance amount and a time horizon, and even a risk approach, would leave investors and advisers in no doubt as to what they should expect. This may in turn relieve some of the pressure on advisers and investors exerted by eager sales representatives showing how their wares have performed better than peer groups (I don’t know about you, but I don’t know many investors who think peers are anything other than members of the House of Lords) which on close examination are rather broadly drawn, comprising funds of a myriad of objectives and approaches. Peer group comparisons can be misleading and unhelpful.
State Your Objective
Ucits III has enabled companies to create funds with objectives that are more tangible and easily understood. They offer investors outcomes which are clear. Even though many of these may not have been met, some have. More importantly, the disparity of returns is less extreme, thus allowing people to plan with a greater degree of certainty. A good example of this is the Bronze-Rated Newton Real Return fund. Its objective is aiming “to achieve over rolling five-year periods a return of Libor plus 2.5% net of fees”. It has consistently achieved this.
By articulating clear specific objectives, fund management companies should be more inclined to offer reasonable and achievable goals. This should in turn draw some of the current, relentless debate on fees away from purely price and towards value for money. It will also enable active fund managers to demonstrate their worth relative to passive investing. Consumers are prepared to pay for outcomes, and I suspect the higher degree of certainty will facilitate the ability to charge a higher price. In delivering clearly articulated objectives, fund managers will engender greater trust in and loyalty from investors, as well as more sustainable businesses. All of these are desirable in a world where investors need all the help they can get.
Read a related article by Morningstar's Christopher Traulsen about how the asset management community should adopt clear, consistent labelling practices for share classes. This labelling would account for intended audiences, fee structures and currency.
The original version of this article was published in Investment Adviser, part of the Financial Times Group.
