Written James Klempster, CFA. Director: Investment Management. Momentum Global Investment Management
I received an email a day or so ago from Apple trying to sell me the new iPad. Tech sales are interesting. In essence the purveyor of the object you bought from them all to recently is informing you that it is now a little bit obsolete. Sure it still works reasonably well but the newer version is incrementally better in every way. A little bit more powerful, slightly better camera, slightly lighter and so on. Your view on the merits of this as a consumer are, of course, a matter of personal taste (and, probably, prosperity) but there are plenty of otherwise abstemious individuals who wear their status as a devotee of their tech provider of choice as a badge of honour, joining the queues to be one of the first to sample the latest vintage.
All you, as the consumer, have to do to access this new functionality is to ditch your existing kit and fork out for the new stuff. Imagine if fund management worked the same way. Inboxes would constantly be bombarded with messages along the lines of: “the fund we sold you a year or so ago is still pretty good but we haven’t updated the holdings since you bought it and while it will probably do an OK job its no longer our best ideas. We will continue to let you know what’s going on in the portfolio (for a time at least) but it will drift further and further from optimal as time passes and at some point in the not too distant future we will cease to support it entirely.
So, when we buy tech we do so knowing that from the moment of purchase it is slowly sliding into obsolescence. It gets worse, though. The other interesting side to tech is it is rarely supplied as a complete experience. Imagine if a fund were sold: “Out of the box the fund only really performs a couple of pretty basic functions and so if you would like to take advantage of the really exciting features you will need to acquire more kit from other providers in our store. Some of these might be free and others you will have to pay for. Also to have a full experience you may need to buy additional hardware…”
Fund managers are, on the whole, a highly competitive and motivated bunch and as a result they are hardwired to want to beat everybody else. An inevitable consequence of this competitive streak is to constantly want to improve, whether that be with respect to investment processes or with respect to the portfolios which come about as a result of the aforementioned process.
Fund managers are continually refining their asset class or company research models, for example. A manager may well test and re test their inputs and reach a conclusion that their process can be improved by tweaking it. Maybe the manager has started researching a new asset class that hasn’t featured in their portfolios before. The sunk cost required to do a decent job of this is significant but it is borne by the manager.
Furthermore, when the manager decides that a holding that has been in the portfolio for some time should be sold or replaced with a new one they make the change rather than hold onto the good ideas to sell you via the next version of their fund. As a result actively managed portfolios are constantly evolving; processes are continually honed. As markets move and company prospects change their relative attractiveness to different active managers changes and so their position may swell or contract in a manager’s portfolio. Investment managers charge regular ongoing fees rather than a large upfront cost and it is understood that the effect of the ongoing fee is that the manager is incentivised to continue to service a longstanding customer as if they were a fresh one.
Fund management companies should incentivise their fund management staff to make good long term decisions in their clients best interest. There is no ‘designed obsolescence’ or product cycles with a well constructed fund it is set up and run for the foreseeable future – for the benefit of investors. Clearly there have been examples in the past where this has not occurred but in the vast majority of instances the intent of the manager is earnest even if the results don’t compete with the best out there. The beauty of a well run fund is that they should be forever young. Fund managers should assess their portfolios constantly to see if they believe them to be well positioned to weather the challenges they expect tomorrow. Such regular regeneration should mean that the portfolio continues to reflect cutting edge thinking meaning that investors do not have to experience the cost, inconvenience and out of the market risk by selling a ‘stale’ holding and moving to something fresh.
Key Risks & Disclaimer: Pennine Wealth Solutions LLP (2 Buckshaw Court, East Terrace Business Park, Euxton Lane, Euxton, PR7 6TB), authorised and regulated in the UK by the Financial Conduct Authority and is for professional investors only. These investments are only accessed via accredited Financial Advisers. Content written by James Klempster Director: Investment Management. Momentum Global Investment Management
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