There are no solutions that meet the aspirations of our customers. Just because investors want a combination of no risk to capital, a decent income and prospects for capital growth, it doesn’t meant there is a solution.
There are no anti-ageing creams that work, but there’s a whole industry to service the demand for them.
Likewise, there are no investment solutions that deliver what most investors want, but an industry has developed that manufactures purported solutions. We have funds described as “low-risk” simply because their prices have historically shown low-volatility, we have bond-based income funds for low risk investors with terrifying redemption yields and the biggest investment scandals in recent years haven’t been offering 20 per cent p.a. returns, they’ve been offering 7-8 per cent p.a. – it’s the easiest way to attract the most money.
The solution is to educate investors properly and explain that risk and reward are inextricably linked. With base rates at 0.5 per cent, investors seeking returns of 5 per cent or more need to understand the risks they’re running. Marketeers need to be reined in by companies to prevent investors having unrealistic expectations, and marketing agencies need to ensure their staff have at least a modicum of understanding of how their clients’ businesses work.
Investors are currently facing the looming “disaster” of increasing interest rates, and the effect that will have on bond values and liquidity, but I doubt any of them have the slightest idea their “low risk” corporate bond fund could soon turn into something very different.
The response to investor demand to have their cake and eat it should be to tell them that they can’t and explain why. Then explain what their options are and allow them to make an informed decision. But I somehow feel our industry will still manage to develop the next “solution” – Secure High Income Trust anyone?