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Inside edge

Mr and Mrs Shaw had never invested in equities before the spring of 2000.

After a number of neighbourhood dinner parties, they were both feeling very unadventurous in their choice of a big high-street building society as a home for their lifelong savings.

Mr and Mrs Shaw are in their early 40s and at that time they were the only people in their social group who had not opened a day trading account so that Mr Shaw could trade technology and media stocks on his own account.

Their IFA had recommended equities to them some years before for part of their portfolio but they had declined, as they were not prepared to take a risk with their hard earned savings.

In March 2000, however, they changed their minds. They were feeling old fashioned and left behind by the new world of the internet and the booming prices of technology stocks.

They approached their IFA about investing in a technology Isa for £7,000 of their total £11,000 savings. Their IFA advised them that the market was too high and now was not the time to make their first leap into equities.

Mr and Mrs Shaw told the IFA that if he did not execute the Isa for them, they would take their business elsewhere and sign up with one of the numerous mailshots that had come their way.

The IFA insisted on a letter from his clients stating that this was an execution only deal and against his advice.

Over three years later, Mr and Mrs Shaw have £1,700 left. They feel aggrieved. Someone is to blame. If it is not the IFA, it must be the fund management company. Is this a clear case of mismanagement or has the client experienced the dramatic downside of risky equity investment?

This example illustrates the problems of a “someone must be to blame” culture. A recent high-profile survey suggests that fund management companies should provide redress for such investors. However, this is far more complex than merely giving clients their money back. It sets frightening precedents.

It seems to be becoming more widely accepted that the industry needs to educate our clients in equity investment. Products need to do what they clearly state on the tin. How will this work in practice?

Does this mean that an equity income fund can only invest in shares with a high dividend yield? What about Barbell strategies combining growth stocks with some bonds if market conditions dictate?

Taken to its extreme, it would mean that active managers would gradually become marginalised as fund providers tracked the index in fear of taking active positions and consequently underperforming.

A compensation culture would be glorious news to the passive index tracking prov-iders. Annual management fees on funds would be forced downwards as it became more obvious that no fund management group wanted to take a risk anymore in fear of being sued for underperforming the market.

We all know that outperforming the index is driven by taking views which are well away from the benchmark but that these decisions can lead to underperformance with a poor active manager but dramatic outperformance with a good experienced manager.

We have been through a dramatic period in stockmarket history. The bubble grew bigger and rational valuations were ignored.

The deflation of that bubble has been very painful with a generation of savers lost to our industry.

Good active management however is worth paying a premium for if results that consistently beat the index in a flat low growth low inflation environment can be achieved.

Mr and Mrs Shaw should not have been in equities at all, even less should they have been in high risk technology shares. We will not see them investing in equities for many years.

They will, however, be att-ending a garden party in their village this Saturday night and talking to their friends. On Monday they will be visiting a number of buy to let properties in their area and taking out a 95 per cent mortgage. They know that property is a one way bet. Who will compensate them in 2007?

Ian Chimes is managing director at Credit Suisse Asset Management Funds


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