Where they acted as the third-party administrator, the structured product manager will take steps to minimise the impact of the bad news.
Investors have probably become immune to bad news due to the constant barrage they receive and unless it affects them directly it will pass right over them.
This is far more likely to knock the confidence of advisers and firms that have sold these products and we may find that the volumes of structured products sold through intermediary channels fall off for a while.
Bamford: Until full details of the collapse become public, I would imagine that investor and adviser confidence in structured products will be rather dented. Since the collapse of Lehman Brothers, this product type has had some serious question marks for the future so I think investors were already quite wary.
However, structured products are mainly the preserve of the tied adviser and old model IFA as they appear to offer decent returns with minimal risk and, of course, a hefty commission payment on sale. As long as there are “advisers” selling these products, there will be appetite for them, even if the investors do not fully understand the mechanics behind structured products or the various risks involved.
Does the decision of former New Star chief investment officer Alan Miller to launch a new wealth management business based on passive management business and low charges signal a change in the popularity of active and star managers?
Hall: First, the charges being talked about by Alan Miller do not really put him in the same category as Vanguard who are about to launch in the UK.
This is passive investment with knobs on and so the “star manager” mantle will probably continue to apply, albeit using cheaper underlying trackers to achieve returns.
To some extent, 7IM with their active allocated passive funds already sit in this area, and while I like the product, it is not yet selling in the same volumes as actively managed funds. There is a growing passive argument but converts are tending to go for pure passive strategies. However, they are still in the minority compared with active devotees.
Bamford: The star manager approach is something that has been slowly falling out of favour among IFAs who recognise the important of process and a team-based approach. There will always be star managers who manage to achieve a god-like status by producing market-beating returns but investors and advisers are increasingly looking for evidence-based approaches to the management of their money.
Rather than settle for an either/or approach of passive or active, both forms of management can play a role in the investment of money. Passive investment works very well in conjunction with strategic asset allocation and can keep down costs but we still believe it is possible to add value through appropriate active manager selection. The decision of one fund manager to back the passive approach in isolation is not enough to herald a major change in attitudes.
The Investment Management Association recently released figures suggesting investor confidence is increasing but that people are still reluctant to invest new money. Does this agree with your experience?
Hall: I do not think that this applies only to individual investor, as their advisers are also demonstrating similar attitudes. My clients’ confidence is returning and so is mine but my confidence is lagging theirs. I sense further trouble ahead more than they do.
Whereas 18 months ago, we would have probably made bigger single investments, we are now dripfeeding money into the markets due to the possibility of this being a W-shaped recovery versus a V-shaped recovery. Clients do not want to miss out on the next bull run but they are prepared to forgo some of the returns if it also means that they do not fully participate in a downswing.
Our clients are aware that investment is a long-term proposition and are prepared to take a measured entry into the markets.
Bamford: This ties up with our experience when it comes to equity investing but investing money should be about all of the major asset classes and not just the stockmarket.
In practice, clients have been more wary about investing their money over the last year and as a result they typically want to understand the process behind the investment recommendations being made. It is no longer sufficient to claim to be able to pick the best fund or sector. Investors have been becoming savvier for years and are demanding a more thorough approach to the advice they get.
The current economic events, which thankfully appear to be coming to a conclusion, have acted as a catalyst for this improvement in investor education and demand for a more robust investment advice process.
The F&C Stewardship fund celebrates its 25th anniversary this year and there are now over 80 green and ethical funds in the UK. The growth in funds has not been matched by a growth in assets in recent years with ethical assets hovering at around £6.8bn, a very similar level to 2005. Do you think the demand for ethical investment has hit a natural ceiling?
Hall: One problem is that as the passive investment approach grows, with ETFs and other tracker funds growing assets under management, there has not been a matching growth in green or ethical passive funds.
If passive funds catered for green and ethical investors in the same way they provided funds for non-green investors, there would be demand above the demand for actively managed green and ethical funds.
I also think that the message has been diluted in favour of other sector and fund focus. The size of the investments to date do not really allow for more specialist green/ethical focus, that is, a green Bric fund or an ethical emerging markets fund, so the funds tend to be more generalist or very small. They are competing in a market that is better placed to attract the investor pound.
Bamford: Demand for ethical investing has possibly reached a natural ceiling. If this is the case, then it could be the result of two combined factors.
First, the number of people actually prepared to commit their money to investing in an ethical or socially responsible manner may have peaked. Those who wanted to take this approach are likely to have already taken it.
Second, awareness of ethical and socially responsible factors for investment has grown globally, which means that, for many investors, it is unnecessary to use a specific ethical fund. These investors may instead assume that all companies have improved ethical standards as a result of better levels of corporate governance, political drivers and transparency.
The FTSE 100 has gained around 1,000 points since its low in early March and has remained above 4,000 points since the end of April. In your opinion, have we seen the worst or is it too early to start to think of a proper recovery?
Hall: This is not a recovery in my opinion but a sucker’s rally. The fundamental data seems to suggest that while the markets may be reflecting fair value now, the excesses of recent years have not been addressed and there are still significant issues with banks’ balance sheets.
The housing market will feel more pain, as will the employment market and eventually there will be a general admission that we are in for a long grind before we come out of recession. Interest rates will eventually rise and this will bring with it an inflationary cycle that, unless controlled, will create havoc. Any talk of a recovery this year is too optimistic.
Bamford: It is still too early to tell but, as each week passes, there are more signs that this is a proper recovery but we will not know for sure until after the event. History can tell us a lot about the behaviour of stockmarkets following recessions and right now that is basically all that investors have to go on.
The big lesson from this crash appears to have been to have a diverse portfolio and not expose your money to risk unless you have time on your side. It is only those investors who have been forced to sell assets during the crash that have really suffered. Others have had a good buying opportunity and have been able to channel additional money, as a result of lower interest rates and inflation, into building their wealth.
With hindsight, many investors will be kicking themselves for not investing everything into the FTSE in March but nobody can make those timing calls with any degree of accuracy. It is far better to invest, keep investing and remain invested.
Has the strengthening pound changed your attitude to investing in European or US equities?
Hall: Being a predominantly passive investor, the idea of having a manager to hedge against currency movements is out of the question.
My long-term view of sterling is that it will weaken against other major currencies, which will make the longer-term investment proposition better for people investing overseas now.
However, with most large- cap firms deriving their income from worldwide activities, the actual reference currency that they are listed in is not quite as important as it might appear.
We cannot predict what will happen to exchange rates over the medium or long term – it is hard enough in the short term – but, by regular investment into different markets, it may be possible to avoid investing when sterling is at it weakest.
Bamford: It has resulted in a slightly more positive attitude towards overseas equities. However, the recent uncertainty over the future of Gordon Brown demonstrated how volatile the currency markets remain.
The pound has attributes to make it stronger against other currencies but there is also inherent weakness.
Until things really start to settle down, many investors will want to keep currency risk outside of their portfolios and avoid both the European and US equity markets.
There are also other factors which make European equities look less attractive right now, so this is not just about currency in isolation.