Financial Resource

Recent research by Citywire, a leading fund research firm, has revealed that the average fund will only retain its fund management team for two-and-a-half-years.

The analysis, which concentrates on UK funds, is the most comprehensive conducted yet and includes 5 years of data.

The survey examined 1,741 funds and found that over the 5 years to the end of August there were 3,440 manager moves.

It was found that managers are more likely to move during times of stock market turmoil, and unsurprisingly they move less when markets are doing well.

Let’s look at some statistics:

– during the 2002/03 bear market, 27% of funds changed hands

– in the year to August 2004 some 23% changed hands

– in 2005 it was 19%

– and 15% in 2006

But what do all these moves mean to you?

If the manager(s) of your investment fund(s) have moved during the last 2 years (and the likelihood is that some will have) you have a number of options:

– leave your money invested where it is

– find out where the fund manager has moved to and transfer your money there (check the details of the fund on offer)

– take a step back and look at whether your money is being invested with a STRATEGIC investment philosophy, as opposed to a TACTICAL approach

The reality (in our experience) is that many investors are following the tactical approach. They hold a number of funds, perhaps with a handful of product providers, and have no real idea where their money is actually invested or which fund managers are in charge anyway.

In fact, one recent client that we dealt with had total investments (Pensions, ISAs, PEPs) of £300,000, spread across 6 providers and 13 funds. Once the overall portfolio was broken down we saw that he had an 89% exposure to equities/shares. When we analysed his attitude to risk it was shown that he would be uncomfortable with more than 55% exposure to equities.

We also calculated that he did not need to take as much equity risk that he was as he was on track to achieve his overall retirement income goals.

What we did in this case was alter his overall portfolio so that:

– his exposure to equities was reduced to 50%

– we created a portfolio that was invested predominantly in low cost asset class institutional funds

– we added a percentage of bond funds to act as an insurance against market falls

– we adopted a ‘buy and hold’ strategy to minimise fund trading costs (if you don’t know what these are you need to find out)

Academic studies show that Strategic Asset Allocation is behind 90% of a portfolio’s return. Ibbotson Associates conducted research that shows that:

– 91.5% of a portolio’s return is due to strategic asset allocation

– 4.6% is due to stock picking

– 1.8% is due to tactical asset allocation (market timing)

And William Bernstein of The Intelligent Asset Allocator said:

“Market timing and security selection are obviously important. The problem is that nobody achieves long-term success in the former, and almost nobody in the latter. Asset allocation is the only factor affecting your investments that you can actually influence”

So why don’t investors folow this path if all the research points this way?

There are a number of reasons:

– ignorance (never heard of it)

– ignorance (heard of it but can’t be bothered)

– greed (I can pick best performing funds and beat the market)

– ego (I know best, don’t tell me what to do)

– conditioning (I don’t want to do something my peers are not)

And no doubt there are many other reasons.

Some in the fund management industry will have you believe that all you have to do is pick a few good funds and you’ll be well on the way to making great returns on your capital.

Of course, this could happen, but all the research points to adopting a DIFFERENT approach. One which you’re probably not aware of right now.

So what can you do?

Simple.

Find out how this alternative approach works. Do your research, just as we have.

The Financial Tips Bottom Line

Think about this for a minute.

As impartial advisers we are able to recommend ANY fund from the thousands available.

What we’ve done though is take a step back (a number of years ago) and look at the alternative investment methods available to our clients. All based around Strategic Asset Allocation.

Maybe it’s time for you to do the same.

ACTION POINT

The reality is that we have yet to meet a new client who understands the importance of asset allocation (and the majority have never heard of it). Just google the term and you’ll see 2.8m results.

The good news is that it’s relatively easy to implement a strategic asset allocation approach with your investments. It’s just a case of knowing which buttons to press to make it happen.

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