Advisers would be well aware of the "Risks" section in financial products’ offer documents, the best known of which relates to past performance not being guaranteed. However, in reality many of the examples of risk listed in a PDS are more likely to be there to reduce the risk to the fund manager as much as, or possibly even more than, the investor.
Whether the investor actually reads the risk section, normally tucked well towards the back of the PDS or IM, or fully understands them, doesn't make a lot of difference: On the application form - paper or via Olivia123's online application solution - the investor, or the advisor on their behalf, acknowledges they've both read and understand the risks.
FundMonitors.com is not suggesting that the fund managers or their legal advisers are doing anything wrong or underhand, and 99% of the time they're above board (the other 1% being outfits like Mayfair 101). ASIC's recently introduced TMD (Target Market Determination) regime has attempted to rectify this, but it remains prescriptive, and depending how it is implemented, it remains to be seen who it protects more - the product issuer, or the investor?
FundMonitors.com has come up with our own series of risk warnings for investors - they might not be "advice" in the legal sense of the word, but the following eight "Rules" might be helpful in avoiding some well-known pitfalls.
Rule Number 1: Diversify!
Commonly known as "not putting all your eggs in one basket". Advisers understand this only too well, but there are still many investors ignore it. Diversifying might reduce returns in the good times, but diversifying across asset classes, strategies and managers reduces risk when compared to investing in a single asset or managed fund, however attractive the returns might seem at the time.
Rule number 2: Correlation!
Diversification doesn't help if all the assets (or funds) in an investor’s portfolio are highly correlated - in a market shakeout or period of under-performance they're all likely to move in the same direction. Again, this is well understood by advisers, but less so by investors, particularly in buoyant markets.
Rule Number 3: Ignore the hype! (Also known as "fear of missing out" or FOMO)
Investing (as opposed to speculating, or punting) is for the long term. There may be a frenzy about one asset or another, but these come and go. Think tulips and "Tulip Mania", which occurred in Holland in the early 1600's. There have been bubbles since, and there will be in the future - and, although not all crypto funds are the same, some will see Crypto as hype. Are your clients suffering from FOMO? We suggest you refer them to Rule Numbers 1 and 2, and then number 4.
Rule Number 4: “Words are words, but only performance is reality”.
Harold Geneen, a former CEO of ITT Corporation is credited with the above quote. How often have we heard the sad tales of poor investments - or total loss (Mayfair 101 again) based on the premise such as "I liked the manager" or "my friend’s invested in it..."
Rule Number 5: Beware following the crowd!
With literally thousands of investment options available in today’s market it is often easy for clients, and even advisers to follow the crowd into the largest or best-known fund managers, even if there are potentially better but lesser-known alternatives available. The problem is that these take additional research, and potentially comes with their own risk – which is where rules 6, 7 and 8 become essential.
Rule Number 6: Understand the Ratios!
There's a whole box full of ratios and formulas used in managed fund research reports which most advisers understand, but many investors don’t, including Sharpe, Sortino, Up Capture, Down Capture and Drawdown ratios - and that's before we start on fees, hurdles and high water marks. If your clients are going to do their own research, it's worth them understanding what they’re doing.
Rule Number 7: Fees aren't always bad!
The fee issue is tricky, and with performance fees, not as simple as it seems. High fees and poor performance are bad. So, by the way, are low fees and poor performance. Generally, in life you tend to get what you pay for – the important thing to remember when evaluating fees is to understand how they work in all market conditions, and to make sure the investor is getting what they pay for.
Rule Number 8: Look before you leap!
Otherwise known as "doing the research" - we could bundle up a series of rules under this one. In the building industry there's an old saying "Measure twice: Cut once". At FundMonitors we refer to it as Compare, Research, and then Invest.
FundMonitors.com provides quantitative information and data covering over 650 actively managed funds including Fact Sheets, Performance Summaries, Performance Analysis and Fund Profiles, along with custom tools, watch lists and portfolio analysis.
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