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In the name of simplicity

The marketing language of investments is supposed to make things easier for clients to understand but instead it often causes more confusion. Is there any solution to the problem?

Is the innovation of fund groups worth stifling to ensure products remain clear and easy to understand or is that even necessary?

Once a new concept arrives, the first group to enter that market may very well describe it perfectly with a fund name. However, it is the subsequent launches where the difficulty arises as they try to leverage the same name, even if they do not do the exact same thing.

Thames River Capital co-head of multi manager Gary Potter is a big fan of the labels the industry uses, siding with the regulator’s push for it to clean up product definitions. Yet others believe more up-to-date terminology is needed as the industry develops.

New descriptions of funds come along with every market trend, which in turn are influenced by market conditions, investors’ attitudes and changing regulations. For example, several years ago, the FSA allowed mixed funds, which enabled portfolios to hold a greater mixture of assets and fund structures. This led to “mixed asset” portfolios, which many fund of funds adopted to enable a wider investment universe.

But while a fund of fund can be a mixed asset portfolio and visa versa, it is possible to have one without the other, hence the confusion that can arise with such a label.

So is the term fund of funds, which has up until now been clear enough to understand, an antiquated label that should be changed? Bestinvest senior investment adviser Adrian Lowcock points out funds of funds come with old stigmas attached.

Among these are the idea that funds of funds are expensive due to double-layers of charges and use long-term strategic asset allocation models. On the other hand, multi-asset portfolios appear more dynamic, focusing heavily on tactical asset allocation and the use of a wide variety of underlying investments.

Yet so too do many funds of funds, they just do not choose to call them-selves by that label. It used to be that funds of funds only invested in other open-ended vehicles, choosing where they wanted exposure and then selec-ting the best managers in that space. Today, it is a whole lot more complex. It is no longer of matter of deciding on say, Japan, and then buying the best unit trust in that area.

Now it is a choice of accessing that story via an Oeic, investment trust, ETF, ishare, structured products or derivatives. Hedged or unhedged? Does the manager want to arbitrage the discount on an investment trust or look for some protection via a put or structured product?

Funds of funds do operate in a dyna-mic fashion so would a name change help dismiss old stereotypes? Potter argues no, believing that fund of funds remains a clear description, even if the assets and instruments they can now hold are wider. It is an evolutionary change in the product, not one that requires the invention of a whole new category.

Certainly, it would appear advisers agree. According to Cofunds sales data, some 30 per cent of net sales went into to the cautious managed sector over the fourth quarter, virtually all of it to fund of funds. In terms of net sales for all of 2010, the platform reported that the top two sellers were both fund of funds vehicles – Henderson MM income & growth followed by Thames River distribution.

Some labels are merely based on short-term trends and will soon fall by the wayside. After all, a few years ago, there was a plethora of total return and cash-plus funds before they were usurped by absolute return. And that is one label of which there is almost universal agreement does not suit everybody who uses it.
Multi-asset is another label that Potter believes has arisen from short-term market conditions and one which has grown out of proportion, too loosely applied.

The problem is that while there are pure multi-asset products out there, many marketing departments latched onto the label. Today it seems to mean any fund that holds different assets, which covers a lot of ground. According to Trustnet data, there are now 708 portfolios in its unit trust/Oeic data base that fall under the category of multi-asset, while only 315 that come under fixed interest.

Potter says: “Lot of groups use multi-asset because it is the ’in’ thing to do – it’s gimmicky and an over-used term.”

The trendy sectors or strategies are not the only ones whereby the name can be somewhat misleading. Income is a tag now being given to different portfolios these days. It is reminiscent of a time, not that long ago, when the industry added value and growth descriptors to many difficult geographically focused equity funds. Those have since gone, which supports Potter’s argument that labels for funds are based on short-term trends.

So what determines the labels with longevity? It should be a matter of keeping it simple – sticking with labels or categories that will not go in or out of fashion and ones which the average consumer can comprehend. For instance, investors easily understand what is a Japan equity fund, even though managers have greater scope to hold more than just equities.

The clear name does not dissuade or confuse the investor right from the onset. Instead, it is left to the adviser to explain the differences between the managers in this space.

As long as it remains clear when investors look at factsheets or other supportive material as to what the manager is doing, then categories and labels used to describe certain fund areas should be left as simple as possible. Otherwise the industry really is trying to make this more difficult for investors than it needs to be, something it argues against during most FSA product reviews.


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