The phrase “if life isn’t complicated enough” is not one for investment managers. They seem intent on bamboozling ordinary investors by making perfectly decent products more complicated – it is as if they do not know they are on to a good thing. There is no end of examples.
Around 150 years ago, investment trusts were born investing in cattle and rail companies. The industry grew and investors seemed happy enough with their lot, yet they were nearly pushed into the sidings when some bright spark around a decade ago decided to invent highly leveraged trusts that invested in each other.
These split-capital investment trusts were so complicated that the financial ombudsman got in a muddle with complaints and the FSA initially rejected the suggestion that the scandal concerned private investors.
Guaranteed equity bonds are another example of products that got too complicated for their own good. They could have been ideal for people who are slightly nervous of stock markets and want their capital protected with a guaranteed return – certainty is not to be underestimated – but that was not enough for providers. They had make the plans more complex by bringing in gearing levels – an invention that led to the precipice bond scandal and left tens of thousands of ordinary savers nursing bumper losses.
The mutual fund industry can’t help itself either. I always recall asking Anthony Bolton, no less, whether he had ever wanted to run a hedge fund. After all, plenty of star fund managers were having a dabble. He did not, because his skill is in picking stocks he thinks will do well, rather than a stock that will fail.
Yet, selecting shares on the basis that they might rise in value is no longer good enough for many of today’s fund managers – they want to be able to short, invest in an array of assets or maybe partake in a currency swap or two. I am not sure investors are reaping the rewards.
Over the past few years a new way of investing has been gaining traction. First in the US and now slowly but surely investors in the UK are starting to cotton on to exchange-traded funds. And why wouldn’t they?
ETF enthusiasts describe them as a cheap way of getting exposure to equity markets. They do not levy front-end charges, early redemption penalties or exit charges and annual servicing charges are often below 0.5 per cent a year.
Neither do they attract stamp duty while they offer exposure to assets hitherto out of reach of investors.
With ETFs the share price moves in line with the index they are designed to replicate. The price at which you buy or sell is close to the value of the underlying assets of the share. If the FTSE 100 goes up by 5 per cent, so will an FTSE 100 ETF.
The RDR is around the corner, which, if you believe some, could give sales of ETFs an even bigger boost because of the demise of commission.
But there is a new breed of ETF – one that involves swaps. Now you can buy an ETF that is not actually investing in the asset its name suggests and some have multiple counterparties.
When financial products get more complicated you get the impression that the only souls to gain are those behind the scenes, rather than investors.
Justin Urquhart Stewart, from Seven Investment Management, recently remarked that the ETFs used to be simple but that “our industry has a wonderful tendency to make things astonishingly complex. Some of these ETFs are now getting to the point where they are basically saying ’this is very clever, so trust me’”.
And when products get too clever by half, investors should start to worry.
Paul Farrow is personal finance editor at the Telegraph Media Group