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View the article online at http://citywire.co.uk/wealth-manager/article/a728530

Stewart Cowley: it's a wonderful life

by Stewart Cowley on Jan 16, 2014 at 14:05

But there is a scene missing here of course; the one outside the bank afterwards. Of the two people who received money, after they exited the door, which one felt good about themselves? Tom who received two hundred and forty two dollars or Ed who received twenty dollars? My money would be on the latter. There is residual discontent because wants rather than needs have been satisfied. 

But we have an industry that is based upon, and positively encourages, the idea that investors appeal to their wants (or what they are told they want) as opposed to listening to their needs.

They are told that they perpetually should want their investments to return the most that is humanly possible – all of the time. It should be blatantly obvious however, to any sensible person, that this is simply impossible, and that anybody who tells you it isn’t, is a charlatan.

Now when you start down the ‘wants’ path you set up a new game called ‘Who’s right?’.

‘Who’s right?’ assumes there are only two results in life, namely right and wrong; with that come the ideas of reward and punishment.

Fund managers who are ‘right’ are rewarded and those who get it ‘wrong’ should be punished. And how do we decide who is right and wrong? Well, by looking at their positions in league tables and whether they have beaten specific, actuarially created indices.

This of course spawns an industry of monitoring who is right and who is wrong, as well as the opportunity to commentate on it. But the thing to notice here that none of the indices or league tables have anything to do with investors’ needs – they only appeal to their created wants. 

If you ever really want to understand why the investment management industry is continually lambasted for the dissatisfaction its clients feel, we only have to look at the needs/wants system and the reward/punishment regime we have set up for ourselves. At the heart of this discontent was the creation of indices to gauge fund managers against.

For this reason, I find it very difficult to celebrate, as some have in January, the 30-year anniversary of the creation of the FTSE 100 and the multitude of indices that followed.

To me it set off a chain reaction of focusing on wants rather than needs that has sown more misery and discontent amongst the people who work in finance and their clients than any benefit it could possibly have brought.

Citywire + rated Stewart Cowley runs the Citywire Selection Old Mutual Global Strategic Bond , which has returned 8.2% in three years to the end of January versus a 2.7% rise in the benchmark.  

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2 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Jan 16, 2014 at 16:26

I always enjoy reading Stewart's pieces and this is no different, its spot on. Market cap weighted indices and peer group league tables that contain a plethora of different strategies within the same sector are an abomination. Not only do they not match investors needs, they lead fund managers to make poor decisions. How many equity managers out there have a large position in a stock for no better reason that it being a large index constituent - my guess is it runs to the 75% mark. In the case of investment grade credit funds people were running with 50-60% in financials prior to the crash, because the index had 50%. Where was the sense in that. Precisely what the solution is I am less sure. Its easy to say needs driven investing makes sense and it certainly does but there still need to be ways of judging managers. Different benchmarks, equally weighted or style driven for example, that match what a manager is attempting may be a solution but does that just lead to greater complexity? There really should be more of a debate on this as for me it is a large elephant in the corner of the investment room. Or perhaps there shouldnt!? Herd stupidity creates the opportunity for people who can think independently and creatively to do well.

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Fundador

Jan 16, 2014 at 16:53

Indices are fine if you know what the limitations are. Having them is better than the prior situation anyway, even if it's all become too sophisticated. Problem is that most people do not know what they want, and cannot measure the benefits. I have been known to say to my colleagues that our clients don't know we are price competitive, but give higher service and (generally) achieve better results than our peers. Yet, it does show up, strangely, in our persistence figures...

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