The Cost of Inertia

It is an unfortunate fact that many investors are ill-served by the outcome of their investments. This is often not because the wrong investments were chosen in the first place, it is simply that, once implemented, the investments have not been properly monitored and reviewed with changes made when necessary.

There are two reasons why monitoring and review are essential. At the strategic level it is important to review asset allocation. This means the type of asset money is invested in and the proportions within the overall portfolio. Asset allocation should be periodically adjusted to reflect your view of the world, investment goals, time horizons and risk tolerance. Because different types of asset inevitably grow or decline at different rates, the asset allocation chosen at outset will be subject to immediate variance. If unchecked over time, an inappropriate risk profile could develop.

Monitoring and review is also important at the tactical level. For example, once a decision has been made regarding the type of assets to which investments should be exposed, the next step is to choose how to gain such exposure and who will be responsible for the dayto- day management of it. Usually this will involve the selection of a range of collective investment funds. In the UK there are thousands of such funds to choose from. Many are simply not good enough.

There are lots of reasons why a fund might not be as good as it should be. For example, it could be a closed fund which means that it is no longer open to new subscriptions. There is, therefore, less incentive for the fund management group to invest resources to achieve a better return for the fund because success will not be rewarded by an influx of new subscriptions. This is a particular problem for literally hundreds of funds previously sold by those banks, building societies and insurance companies that have been subject to merger, acquisition or rescue.

Another common problem is a fund manager might be ‘promoted’ to a level where he or she is less competent. What I mean by this is that a fund manager could do very well at managing a fund of, say £100 million. However, if their success results in a high level of new subscriptions, the fund under management could rise to £1 billion. More money to manage means a need for more ideas and better processes. If these are not forthcoming, performance will inevitably suffer.

It is important to be just a little cynical when dealing with financial matters. Forget the marketing that is designed to give you a warm feeling. Financial institutions will be quite happy to have your money languishing in one of their under-performing funds while they continue to collect management fees. These organisations exist to profit from you rather than serve you. This is not necessarily a bad thing, provided you make sure that you are profiting too.

So what determines a good fund? Space dictates that I leave this for another time. Talking to an independent adviser with a strong investment background will help you sort the wheat from the chaff.