Why some investment options are hard to swallow

There’s an excellent article by independent fund analyst Simon Evan-Cook on the Citywire Wealth Manager website (read it here). He’s done what many people should do and embarked on an ‘investment elimination diet’.

His findings are illuminating and very much align with our investment philosophy at PortfolioMetrix.

It’s worth reading the whole article but to summarise, the things he eliminated to try to achieve better investment outcomes include:

  • Market timing: he avoids managers who attempt to do this, which rules out macro funds.
  • Direct Securities: he said he’d be foolish to think that he could do this better than a specialist fund manager in the “scraps of time I have between my day job and the rest of my life”
  • Structured products: he points out that all humans are terrible at cross-multiplying the true odds of different possibilities. He questions whether you can rely on banks not to load structured products with hidden risks while stripping out potential returns for themselves.
  • Alternative assets: he prefers to stick to the tried and tested asset classes, such as equity, bonds, property, gold and cash. Although not perfect his view is they’ve survived enough market cycles to suggest they’ll survive a few more.
  • He also pointed out that excessive fees and closet tracking by some so-called ‘active managers’ cause tired-looking returns but they often get away with it because they never result in outright collapse.

What he kept:

Active funds: he does believe some active managers can add value post fees. But he highlights that there is “a ton of mistakes” you can make when selecting active funds, including buying one that is too big and mistaking luck for skill.

Our position on passive is that competition is good for the end investor. Access to passive routes is helping the industry to reduce the number of closet indexers Simon refers to, who are lazily tracking an index while charging a premium. But we are big fans of true active managers – those who do strong company research and take non-index positions that reflect that research.

In our portfolios, we use a blend of active managed funds and support these with passives where we don’t have enough conviction that we’ve found a manager who can outperform the index after fees. The essential element is to do quality research to identify which ones deserve a place in the portfolios. Research is at the heart of our fund selection process and using a mix of qualitative and quantitative analysis is central to enabling us to filter managers into the skilled and unskilled.

Robust portfolio construction is crucial too though, with the key here that it’s essential to diversify across different managers. No decision-making process is ever perfect, so you shouldn’t ever choose just one manager (or asset class, or sector, or currency or country). In our opinion, diversification is absolutely fundamental to investment success.

The health benefits of many diets are questionable but Simon’s investment diet is to be applauded. It is, we think, a very sensible guide to improving investors’ long-term wealth.