Evercore Pan Asset

I saw in Pensions Week a report accusing the investment, pensions and securities market of being little trusted. The headline said that the industry was less  trusted than  the used car business, though the story underneath did say investment personnel managed to stay above estate agents and second hand car salesmen in public esteem.
 
I can understand disappointment with investment management in recent years. Two big changes have led to the feeling of some clients that they have been let down by the typical investment manager. The first has been the long ten year period when investing in US, UK or European shares has overall delivered no return. Many investment professionals have told their clients they should win by buying shares, but time after time it just has not worked out that way in the major markets. Japan has been a poor performer for twenty years, just to add to the misery.
 
The last straw was often what happened to many clients in 2008-9. Many investment managers just stood on the sidelines and watched their client’s money disappearing in the Credit Crunch and market crash. Clients may well have said they were prepared to run some risk. Doubtless they were told they might lose a lot of money quickly if they opted for riskier assets. It still hurts to see it happening, and to watch as your investment manager too just watches. All that money you have worked hard to save, or all that profit you made from long hours and much worry running your own business, was suddenly disappearing at a fast rate. Of course that undermines confidence.
 
It is when returns are low or nonexistent that other things come to matter more. If a manager has just made you 20% you might overlook the imperfections in service or the way the manager makes you fit their business model rather than giving you personal service. If he has just lost you 20% you become more irritated with the lack of personal service or explanation. If we stay in a world of low returns the costs of management become much more of an issue.
 
A hedge fund that produces a 30% return can get away with charging 2% as a base fee and maybe another 4% as a performance fee. The client is still 24% better off. If the hedge fund produces minus 8% one year and plus 9% the next year, charging 2% a year in each year comes straight out of the capital the client gave the manager to look after. It seems a bit steep in the circumstances.
 
There are two things that can help improve the relationship between the industry and the clients. The first is honesty about what can and cannot be achieved and what is happening. If there is a crash the manager needs to reassure or take protective action. He needs to explain and communicate more, and to check his client is still with him in a period when owning risk assets are dangerous for your wealth. The Regulators rightly make an investment manager ask the client to spell out their aims and willingness to shoulder risk at the start of the relationship. Maybe the manager also needs to understand that people’s perception of risk and enthusiasm for it waxes and wanes depending on the mood of the times.
 
The second is simplicity. If you keep the message and the portfolio straightforward the client is better able to understand it, see the risks he is running, and know what you are trying to achieve. Complexity can be the enemy of success. Complexity usually means extra cost. It may mean hidden risks. It may mean even the investment manager himself is struggling to grasp all the features of the product he has purchased for his client. There is a need for clarity on the fees and charges that benefit the manager, so the client knows what he is paying.

There will always be some tension between client and investment manager where the investment manager has streamlined or homogenised the service. Investments are personal and everyone has a slightly different view of what they are and what they are trying to achieve. To reap economies of scale or to make it easier to run investment houses standardise. The more they do that, the more individual clients feel the rough edges of the common service. Performing well may make up for that. Perform badly, and it really grates.