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Mismatch of the day

I once had a client for whom the optimum portfolio was a single share – either he held it or he didn’t. In a similar vein, the riskiest position he ever took, in his view, was holding only cash. In such circumstances, it meant he was bereft of positive ideas and was invested in an asset class bound to be eroded by inflation.

OK, I am going back more than 30 years when inflation was above 20 per cent a year – and the client in question was a stockbroker, so hardly your average private investor. At the time, I worked for a merchant bank and my job was to lend him money to fund his share dealing but I was put in mind of how he approached investment by last week’s round table on risk held by Cofunds.

It happened I was asked to chair this particular discussion, which gave me the chance to air some of my own views on the subject. My concern remains that the average private investor (certainly not my client of the mid 1970s) has no real understanding of what risk really means. Worse, I wonder whether many advisers fully grasp risk principles.

The trouble is that risk means different things to different people. My stockbroking client (who retired to a tax haven in his 40s, so his approach couldn’t have been that stupid) had an attitude to risk that would have most investors reaching for the valium. And there is also the fact that the world has changed. Not only is it global these days, product options, particularly those with some form of built-in risk control mechanism, have widened considerably.

OBSR’s Richard Romer-Lee made the point that many funds launched to cater for a more risk-averse public carried greater potential volatility than their names suggested. Cautious Managed funds, for example, were able to hold up to 60 per cent of their portfolio in equities. Cautious? Not necessarily, in his opinion.

While the behaviour of markets since March suggests there has been some return of an appetite for risk, successive scares, starting with the dotcom bubble bursting nearly a decade ago, have undoubtedly created a demand for less risky investment products. Choosing what suits the attitude of the investor is no easy task. What an opportunity for advisers, opined Cofunds’ Russell Lancaster.

And here is both the opportunity and the threat for advisers. With risk being such a subjective element in investment choice, those seeking to place their capital in a suitable product need to have the likely outcomes fully explained to them, having first defined the degree of tolerance they are prepared to accept. Get it right and all will be well. But there is a big chance of a misunderstanding.

At the round table, both HSBC, represented by David Chellew, and Sergio Ferreira of Aviva demonstrated how much resources were now being thrown at ensuring asset allocation and product selection satisfied individual investment mandates.

No one felt a more prescriptive regulatory regime would help. I rather fear, though, that, with the opportunity for a mismatch between delivery and expectation so high, this is just what we might get.

Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership

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