A fortnight ago, I recalled the tale of a 70-year-old pensioner who popped into his local highstreet bank to moan about the dismal 0.1 per cent interest he was getting on a sizeable cash Isa and asked them how they could help.
The bank asked him to fill out a questionnaire to assess his risk and, perhaps not surprisingly, it turned out he was a cautious investor. When I talked to him, he said he did not really want to risk losing any of his money – after all it had been in cash for several years – he just wanted to get some sort of return, perhaps 4 or 5 per cent at best over the next four or so years. His car might have packed up by then, so he might need access to some readies.
Yet I was surprised with the portfolio the bank had planned for the customer – a customer who had never invested in a unit trust or Oeic, let alone knowing about hedging, derivatives, currency swaps or generating alpha. The bank suggested that a quarter of the portfolio should be split into five funds – Fidelity special situations, JPM emerging markets, Fidelity South-east Asia, JPM natural resources and Blackrock UK smaller companies.
There is nothing wrong with these funds per se – they are frequently tipped by financial advisers, especially for savers hoping to capitalise on long-term growth opportunities. But is the mix suitable for a 70-year-old cautious investor? JPM natural resources manager Ian Henderson readily admits that his fund is volatile.
To be fair to the bank’s adviser, the main chunk of the portfolio – around 60 per cent – was to be split between three cautious funds. But again the choice of funds appeared odd. One fund (a multi-manager fund) was barely two years old and had yet to outperform its benchmark – it will not surprise you to learn that this fund was a tied product.
A second fund in this core segment of the portfolio, which made up a hefty 25 per cent overall, was in the Fidelity new multi-asset defensive fund. I am not questioning its manager Trevor Greetham but this fund is a new type, is barely nine months old and has just £6m under management.
Should a cautious investor be putting a five-figure sum into an unproven fund (and, let’s face it, an unpopular one at present), when there other cautious funds with track records available?
The third cautious fund was JPM cautious total return. Here is a fund that has proved to be one of the better sellers in the absolute return space but it has had one or two hiccups along the way.
On checking the customer’s overall asset allocation for his portfolio, a little under half was exposed to equities. The bank informed the pensioner that he would pay a 4 per cent charge in the first year although he seemed unaware that there would be an ongoing annual management charge too.
This portfolio bamboozled the bank customer and left him thinking he might get a return of around 5 per cent a year for the next five years. It might well do. It might even do better but it could do a lot worse and lose him money. Given the circumstances, you have to question the bank’s motives.
When I talked to him, he said he would settle for a cash Isa paying around 3 to 4 per cent over the next four years. The return would be tax-free, his capital would be safe and he would not be spending thousands of pounds a year in charges. But guess what? The bank, unlike some of its rivals, does not have such a product.
Paul Farrow is personal finance editor at the Telegraph Media Group