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Time to end this misleading Mis-Labelling
There is nothing more infuriating than thinking you are buying one thing – and then getting another. Still, when that happens with a mail order shirt then it is very simple, you just post it back and get your money back. If you buy something which is clearly labelled as one thing but turns out not to ‘do what it says on the tin’ then you chuck it back at them. However, just in case none of that works we also have the power of the law to back us up in the form of a whole range of Trades Descriptions Acts.
This is all marvellous for the consumer and of course should apply to all the consumer items we have to deal with – until, that is, we get to the financial services industry and especially when buying various types of investment funds.
For many years various trade bodies have tried to operate classifications of different types of funds or portfolios. The Investment Managers’ Association (IMA) has structured a range of classifications of funds to try and describe their contents. The key for such classifications is to go back to their reason for existence – and this is clearly to provide greater definition and direction to investment advisers and their clients. Following this logic, then whatever the titles that are being applied, then the constituents must properly reflect them. This is relatively straightforward in, say, any geographical divisions, although even this can be blurred when looking into the underlying investments. These may be being quoted in one market but may in fact be a company from a completely different area – just look at the makeup of the FTSE 100, where over 65% of the profits of its constituents are from overseas and an increasing number of the individual companies are not British at all.
The problem comes to the fore though when dealing with more subjective divisions where interpretation can sometimes be at best vague and at worst positively misleading.
For example, if you look at the ‘Balanced Managed’ classification you will find that rather than having a broadly based range of different asset classes, the portfolio can consist of up to 70% in equities, with the rest made up of a bit of fixed interest bonds, property and cash. This is not just unbalanced; it is potentially a highly volatile and thus much riskier investment structure than the average balanced investor would probably expect to have.
Even the ‘Cautious Managed’ sector can often have 50-60% in equities and this is hardly a level of potential volatility that most would call cautious. These are misleading titles.
This has come about because in the past, portfolios were predominantly made up of equities and thus these allocations were effectively the ‘norm’. However, since those days innovation and development in investment management have taken us a long way from the somewhat simplistic attitude of just balancing a combination of equities, fixed interest, property and cash. There is also a similar level of measurement by APCIMS which manages the classifications for stock broking portfolios and again a balanced profile is quite likely to have in excess of 70% in equities.
The increased use of the disciplines of institutional management have led to a broadening of investment classes and greater appreciation of both risk and volatility management. This has meant that through the greater understanding of correlations between different asset classes, portfolios and their managers can have a far greater understanding and appreciation of the risk and variation in the behaviour of their portfolios and thus the greater understanding for the opportunity to achieve their desired outcome. Therefore now we can have Cautious portfolios that really do take a cautious approach with, say, just 25% in equities and the rest broadly spread across the other asset classes globally.
These old classifications must and indeed will change, but along with them so must the attitudes of the authorities such as the Ombudsman, so that the understanding of far better risk management and control are reflected in investor’s portfolios.
And finally... For those who prefer to take the longer view of historical events, the 24th of August was the 1600th anniversary of the sack of Rome by Alaric I, the leader of the Visigoths. The Roman capital had been in fact already been moved to the Italian city of Ravenna by the young Emperor Honorius, after the Visigoths entered Italy. However, this was the first time in 797 years that Rome had fallen to an enemy. The previous sacking of Rome was by the Gauls under their leader Brennus in 387 BC. St Jerome, a citizen in Rome at the time, wrote that "The city which had conquered the whole world, was itself conquered..."
A timely reminder to all superpowers that their time will finally come to an end.
Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited
Article last updated: Sep 1, 2010
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