MAY 2012


hy invest? It is a question that would have been unthinkable 10 years ago. People invested because it brought them higher rewards than cash, protected their purchasing power, delivered them a growing income. But volatile markets, economic crises and political interventions have conspired to shift the narrative on investment. Cash may not pay much, but at least the overall pot remains the same, it is argued. Increasingly, investors are questioning why they should invest at all, whether investment risk is worth taking, rather than simply where they should be invested.


Time to get active W


One of the biggest challenges for advisers is to reverse this view. Few investors are likely to meet their long-term goals with a portfolio invested in This supplement aims to help advisers demonstrate to clients why investment, and more specifically, active management, is a risk worth taking. Part of the problem has been the current narrative on fund management. High-profile spokepeople have managed to reduce the debate to a simple discussion on costs: “value” in fund management has come to mean cheap. Cheap equals good and expensive equals bad.


This narrow definition of “value” has led to the assumption that passive is good and active is bad. Yet passive funds are likely to underperform their underlying index because of the costs of buying. Compounded, this can act as a significant drag on performance. Is this really better value than a strong active manager who strives to protect capital in market sell-offs, to spot tomorrow’s winners and to avoid the “danger” stocks? Over the years, it has been extremely valuable to have an investment manager who could call the top of the technology bubble, avoid BP or skew a portfolio to recovery as the need arose. Investors need to ensure they are truly receiving value, rather than simply paying low prices.


The same spokepeople have also raised questions about the “hidden costs” of fund management. Many have tried to create the illusion of a shady world, lining its own pockets at the expense of investors through higher dealing costs. This ignores the simple fact that active fund management is singularly transparent. If a manager does employ high turnover in a fund unsuccessfully, it is right there in the performance statistics for all to see. Given that fund performance still drives the majority of inflows into funds, it seems self-defeating to engage in high turnover just for the sake of it. However, there are perhaps some more heart-felt reasons why investors may be reluctant to pull their cash from under their mattresses or prise it from their bank manager’s fingers. The memory of the “lost decade” for equities runs deep. It certainly made good headlines and unquestionably, those who invested as the FTSE 100 neared 7000 in 2000 could be waiting a long time to recoup their money. Yet, this was a unique time in the market – a bubble unprecedented in modern times. The buy and hold investor who invested 10 years ago from today is up about 9.3%. It remains an unimpressive total given the volatility, but it is not a lost decade any more. Ah yes, volatility. This has been the most uncomfortable area for investors. Most can deal with occasional drawdowns, but they have struggled to deal with the unpredictability. The 40% losses on some asset classes in 2008 were scarring. Nevertheless, the solution taken by many investors, to avoid investment or look to passive strategies, is surely irrational. Volatility has created opportunities. Looking at IMA fund flows, investors have become more savvy at capitalising on market weakness. Money no longer ebbs and flows exactly in line with the highs and lows in markets. Equally, passive strategies are the one way guaranteed to participate fully in the market rollercoaster. There is no qualitative attempt to try to mitigate losses. However, the current investment climate requires a shift in mind-set on the part of investors. For many years, “buy and hold” was standard investment wisdom, but this view has shifted. Investors – and their advisers – have to be more tuned into the prevailing market sentiment, plus


WELCOME


Cherry Reynard challenges the definition of “value” in investment management and argues active investment is a risk worth taking


PLUS+ Welcome


Solutions for all seasons


5


05


Cherry Reynard says active investment is a risk worth taking


08


Paul Farrow says uncertain times call for an active investment strategy


Model portfolio construction 10


Investors can diversify their portfolios to cut risk, says Rob Gleeson Fund selection


Kira Nickerson hears how six fund strategists pick their managers


Options for income 16


Investors are looking to specialist asset classes for consistent returns, says Adam Lewis


Options for growth 17


Funds with a range of assets will appeal to the cautious, says Harriet Meyer


The future of fund management 18


The industry has come up with new solutions for squeezed investors, says Cherry Reynard


Asset allocation


Tom Hirst discusses the relationship between economic growth and stockmarket performance


Fund profiles ‘ ‘ 21


Active fund management is singularly transparent. If a manager does employ high turnover in a fund


unsuccessfully, it is right there in the performance statistics for all to see


Introduces our range of fund interviews Aberdeen Asset Management 22-23 Alliance Trust Investments 24-25 Aviva Investors


26-27 Baring Asset Management 28-29


Fidelity Worldwide Investment


Guinness Funds


J.P. Morgan Asset Management


Jupiter Unit Trust Managers Limited


Liontrust


Neptune Investment Management


Schroders


30-31 32-33


Ignis Asset Management 34-35 36-37


38-39 40-41


42-43 44-45


Unicorn Asset Management 46-47 19 14


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