Investment managers have a duty to be stewards of investors’ assets, and this includes marketing products responsibly.
The average investor is in a vulnerable position. There is a constant tension between the need to save for retirement and the need to keep up with the ever-growing demands on their finances. In addition, investors have to cope with this tension in an environment characterised by market volatility that threatens to derail what was supposed to be a smooth journey to a comfortable retirement. This tension often results in investors acting in ways that seem to make sense at the time, but threaten the success of their investment strategy in the long term.
The regulatory environment has changed substantially over the past decade, and investors can now see what is “in the tin”. They know what they are being charged for, they know about risk profiles and fund mandates and other aspects of investment products. However, their decisions can still result in a wide range of possible outcomes.
Market and media influences make it harder for investors to make sensible decisions. The market is configured to encourage investors to buy high and sell low, and it is uncomfortable to do the opposite. As if that were not enough, investors are bombarded with marketing messages that encourage dysfunctional investment behaviour.
Focusing on short-term performance is a key factor that prevents investors from reaching their goals.
We, as investment managers, take our role as stewards of investors’ savings seriously. We take a long-term view, do our research diligently, and always aim to build a margin of safety into all our investment decisions. But is that enough? We don’t think so.
There are many examples of wealth-destroying behaviour in volatile times that were driven by marketing messages designed to create fear in investors. One example is the capital flight into offshore investments early last year, when the rand weakened dramatically and these products were advertised aggressively. Investors who switched out of underperforming local equity funds into offshore accounts ended up worse off. Although their local investment initially fell, prompting them to take their money offshore, their offshore investment suffered when the rand recovered. In the meantime, the investment out of which they had sold performed well, preserving its long-term track record and delivering on its promise.
Responsible marketing can make a real contribution to better outcomes for investors, by helping them to:
• Not switch investments unnecessarily (sell out of one fund and buy into another);
• Take a long-term view and adhere to their investment strategy;
• Stomach short-term underperformance, which is often inconsequential in the long run;
• Understand a fund manager’s investment approach, so that investors can better select funds; and
• Diversify their investments, based on the understanding that certain parts of their portfolio will underperform from time to time, but other parts can compensate for this underperformance.
Investors are grown-ups with free choice, and marketers can put their value proposition forward in any way they want. However, this does not justify exploiting investors.
Investment marketing messages deserve as much thought, consideration and consistency as the investment process, and should be aligned with the investment process.
Investment managers need to be as serious about improving the outcome for individual investors as they are about the performance of their portfolios. Sadly, the two are often far apart.
Anet Ahern is the chief executive of PSG Asset Management.