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Off the beaten track

I have been struck by the way in which alternative asset classes are gaining more coverage. It is a brave portfolio manager these days who confines the selection of investments to mere cash, bonds and equities.

But do not expect life to be made easier by the introduction of instruments designed to track, for example, commodities indices. Aside from anything else, different indices enjoy differing characteristics. The Goldman Sachs Commodity index is weighted 73 per cent towards energy. Contrast this with the Rogers International Commodity index, where just 44 per cent is energy and agriculture weighs in at 35 per cent compared with only 15 per cent in the Goldman Sachs model.

I mention these two examples not to form any judgement as to which approach is right but to highlight the growing complexity of selecting an index to deliver exposure to a particular asset class.

Not that life is really that different from those seemingly far off days when investment management was more of a cottage industry and the Americans had yet to turn our processes upside down. Towards the end of the 1980s, I was director of a company anxious to be the first to launch retail index funds to the wider public. We were pipped at the post by Morgan Grenfell’s funds arm for reasons too bizarre to recount. We continued with the process of issuing vanilla index-tracking unit trusts but the pressure was now on to devise a more esoteric offering. Blessed as we were with a creative quants team, the answer came in the form of a fund designed to follow the fortunes of seven of the smaller Asian markets. The Tiger tracker provided for a wide tracking error, which was just as well as the first year saw it lag its benchmark by a significant margin.

This was not the consequence of poor management techniques, rather the result of endeavouring to follow the fortunes of markets with limited liquidity and where the indices were difficult to replicate on the ground. Greater sophistication, more understanding of the issues involved and the globalisation of the investment industry means that problems of this nature are easier to spot in advance.

Even in the more conventional investment areas, life has become considerably more difficult of late. Last week we learned that hedge funds account for a quarter of shares of the London Stock Exchange. Hedge funds have been around for a lot longer than many people realise and cover as wide a range of approaches and disciplines as you will find in the investment arena. Even a few years ago, their presence in corporate activity was, if not absent, then certainly less public. Today it seems no bid is complete without their involvement.

It is hard to imagine how these aggressive managers might further change the face of investing in this country. Knowing that change is inevitable does not exempt advisers from adequately researching and understanding the nature of the investments they recommend. It seems that better training and more transparent products are a pre-requisite of a forward-looking investment regime.

Brian Tora is principal of The Tora Partnership

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