Investment profile
The good, the bad and the ugly
Associate director of Horizon Group Ross Van Geest comments on how the investment world has changed and offers advice on what to look out for when choosing an investment manager in 2009.
2008 proved to be an incredibly difficult year for investors to generate positive returns due to the indiscriminate and rapid sell off in virtually every asset class. What began as a credit crisis has now developed into a recession in the US, the UK, the Eurozone and Japan, the effects of which are being felt worldwide. Equity markets, bond markets and property markets have all had a disastrous year by historical standards. Commodity prices have plummeted as expectations for growth in China, a major driver of the late bubble, have fallen. Inflation fears of early last year have been replaced by the prospect of a prolonged period of low interest rates and disinflation, perhaps even deflation. The hedge fund industry is facing enormous difficulties and all indications are that de-leveraging has some way to go as redemptions continue. After four years of a raging bull market the world has clearly changed and at an alarming pace.
The big players
Within this changing world the theory behind choosing an investment manager has also changed. In the past many investors have felt that by investing with the big investment banks that have a global brand, they were reducing their risk. 2008 has certainly brought this theory into question with the big investment houses reporting multi billion pound losses. With these losses have also come redundancies and huge levels of staff turnover. These changes are certainly impacting service to clients who don’t know who in the bank to contact from one minute to the next. Many of the investment banks that are still around have taken refuge in dugout shelters and will perhaps reappear some time in 2010 when the all clear finally sounds.
The recipients of this fall out and re-consideration of institutional risk has undoubtedly been the small, niche investment managers where business continues as normal. Where as these investment managers were once considered to be much higher risk, they have generally been the managers that have preserved their client’s wealth to a greater extent. Furthermore service levels have never faltered due to staff retention whilst relationship managers and portfolio managers have remained highly visible and always at the end of the phone through the good, the bad and the very ugly.
Low risk income
Another major change to the world in 2008 has been the move to a low interest rate environment. Cash deposits had been a safe haven for investors in 2008 prior to the full onslaught of the banking crisis and while interest rates remained attractive. Given the further cut this year in the UK base rate to 1%, bank deposits are currently paying next to no interest. As a result many investors are now looking to investment houses for reasonably low risk income generating portfolios to boost the yield over and above their current cash deposits. This is of course happening at just the time that choosing an investment manager is extremely difficult and choosing the right manager is perhaps more important than ever.
There are undoubtedly many considerations to take on board when choosing a new investment manager especially in 2009. In particular, investors need to look for those managers that have a strong, long-term track record. Long-term returns should be consistent with the investment strategy and there should not have been any major and unexpected shocks to this performance. The volatility of a portfolio should also be in line with the strategy and risk profile. In addition the strategy should not have changed dramatically from inception although it will undoubtedly have evolved.
Enhanced due diligence should, without question, be undertaken on any investment manager. Ask them for their due diligence questionnaire which will give in-depth information on, for example, the business, investment and due diligence process, key staff retention and retention of assets under management. In essence the questionnaire will go above and beyond what would typically be disclosed to retail clients.
Moving forward
Market crashes such as the one last year seem to bring out in the wash various frauds such as the Bernard Madoff Ponzi scheme. Increased investment transparency is more important than ever in the current environment and investment houses should be able to give regular access to fund managers. It is also anticipated that many multi asset class managers will move back towards a more traditional investment approach having utilised more uncorrelated and illiquid investments to protect the downside of portfolios in 2008.
It is always worth remembering that if an investment opportunity looks too good to be true then it probably is. It is therefore important when selecting an investment manager that they have a highly resilient due diligence process and a track record of avoiding blow-ups. It is also important to look for those investment houses or funds that have come through 2008 relatively unscathed and won’t be impacted by historic issues moving forward.
Horizon Investment’s overriding objective of protecting capital in a downturn was achieved, as illustrated by significant out performance of both our peers and major indices. There are now undoubtedly pockets of value across the spectrum of asset classes as a result of distressed pricing and the considerable dislocations that have appeared. Furthermore, the events of the last six months have differentiated the stronger managers from the weak.
Choosing the right investment manager to guide investors through these challenging times and for the long term has and will prove to be ever crucial.
