The Wealth Management Association (WMA) has come under pressure from discretionary managers to overhaul its private investor indices.
The bond allocation on the set of indices has come under particular fire for being “redundant” and “flawed”.
The indices, which the WMA runs in conjunction with FTSE, are described as “a set of calculations that indicate the returns that investors might expect from their portfolios”.
However, discretionary managers have claimed that the indices are irrelevant to what they are currently investing in and have accused the WMA of being slow to adjust the allocations on the indices.
The complaints centre around the allocations to bonds through-out four of the indices; Conservative, Income, Balanced and Growth. The performance of the indices is calculated by tracking the performance of an index or indices for each asset class in the allocation - so bond allocation is expressed through a bond index and equities through an equity index.
However, the entire bond allocation throughout the indices, which currently comprises 50 per cent of the Conservative index, is tracking a UK government bond, or ‘gilt’, index.
Louis Coke, investment manager at Charles Stanley, said the indices were “pretty redundant” given that he does not currently invest in gilts.
Mr Coke said the bond allocation in the indices could do with being overhauled. “They could rename it fixed interest and have X per cent in gilts and X per cent in corporate bonds or track a hybrid index; both would be more appropriate,” he said.
Gavin Haynes, managing director of Whitechurch Securities, acknowledged that it was difficult to set up indices that are relevant for everyone, but questioned whether the gilt allocation was a fair reflection of what discretionary managers are currently doing. He said: “Given that we are not alone with having nothing in gilts I therefore have to question the indices, especially the conservative index having 50 per cent.”
Like Mr Coke, Mr Haynes advocated broadening out the bond allocation to include sterling corporate bonds or even global bonds. He said: “[The WMA has] a measure for international equities and it could do that for global bonds as a diversification.”
John Howard-Smith, chief executive of Psigma Investment Management, has accused the WMA of creating “naïve indices” that are too slow to keep up with what investment managers are doing, which he said makes the indices “flawed” and “irrelevant”.
Mr Coke agreed that the WMA seems to be much slower than its members in making changes and said the indices “could do with a revamp as the asset allocation should change more often”.
“Asset allocation is the prime driver of returns and so it should change depending on the market. Having the same allocation and not changing year after year is not helpful.”
The WMA said its indices provided investors with “an objective measure of performance against which to measure their investment portfolios in the long term”. It added the allocations were altered in November last year and would again be changed in February “in response to users’ feedback”.
“However the indices are not an average and their aim is to track allocation over time and provide valuable insight over an extended period, rather than reacting to short term trends.”
The WMA said it was “fully transparent and open” about the governance of the indices, adding it would welcome “constructive comments” from members on any improvements.
