Last week, Investment Adviser reported on new concerns regarding the Mifid II rule that demands clients be notified of every 10 per cent portfolio drawdown. The discussions now starting to take place between advisers and discretionary fund managers speak to a wider issue about long-term investing.
I’ve written before about the downside of discretionary fund managers’ relatively newfound status as the principal players in the retail fund buyer market: DFMs’ positioning was likely behind last summer’s run on property funds that saw several portfolios temporarily suspend redemptions. Discretionaries sell themselves on their superior investment abilities, aiming to translate this into healthy long-term performance. But their methods can be distinctly short term.
Adviser clients are no novices; their investment knowledge is quite clearly several levels above retail investors’. So it’s understandable discretionaries may feel they have to justify their existence by making tactical moves where possible. The wholesale (no pun intended) shift out of property funds was a prime example.
Outflows had already begun earlier in the year, and the surprise vote to leave the EU increased nervousness. DFMs rightly foresaw the possibility of funds being gated, and angry clients demanding answers. But in anticipating this, by moving their sizeable holdings en masse, they created a self-fulfilling prophecy.
This short-termism won’t necessarily manifest itself elsewhere. The retail industry was all too aware of the risks inherent in portfolios buying physical properties while simultaneously offering daily dealing to clients. Other asset classes are far less vulnerable to this danger. When it comes to liquidity, in many cases there is little advantage to being the first mover.
Absent this concern, one other perennial barrier to long-term success remains: the impulse to sell or buy a position at precisely the wrong time. Here, DFMs’ rise may prove a help rather than a hindrance to the cause of long-term investing. Behavioural biases will always exist, irrespective of who makes an investment decision. But another layer of intermediation in the investment chain is unlikely to make this worse.
Lines of communication between end clients, advisers and discretionaries can prove complex, and difficult to manage in the event of a drawdown. Yet a certain distance between a frustrated client and an investment manager could prove fruitful in the long run. After all, it’s easier to be a DFM hearing an adviser say ‘I appreciate your rationale, but my clients are annoyed’ than an adviser bearing the brunt of that annoyance.
So while DFMs will always chop and change portfolios, there is a chance that they will prove better able to resist the temptation to do something rash. Let’s just hope the Mifid II requirements don’t prove this idea’s undoing.
Dan Jones is editor of Investment Adviser