INVESTMENTS
VALUE – LOOK AT IT FROM A CLIENT ’ S PERSPECTIVE
David Macfarlane Director ( Discretionary Wealth Management ) HSBC Asset Management
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recent debate I was listening to on growth and value investing went down an interesting , if not slightly offpiste , route looking at the value received by investors and the question of whether higher fees indicate more proactive , and indeed better , management . It is an interesting debate and the view that is taken will , to some degree , depend on your views around active or passive investing . However , our belief for our multi-asset funds – and this is supported by academic studies 1 – is that the asset allocation is the principal driver of returns ( for example 91.5 % according to Brinson , Singer and Beebower in Determinants of Portfolio Performance ii : An update -1991); so getting that bit right is key . On top of this , it is important to look to fulfil the investment decisions in the most cost-effective manner to seek to achieve the best possible return for a given risk profile , hence the use of passive funds within our portfolios . A common misconception can be that using passive funds means taking something away or not being able to ‘ add alpha ’. It doesn ’ t if you believe asset allocation is the key , as that is where you can add most value , or ‘ alpha ’ for those that like jargon . Cost-effective fulfilment , or the use of passives , is then critical – this ties in with the point about value , and we should all look at value from a client ’ s perspective ; higher costs just mean more of the return doesn ’ t go to the client . All asset managers will have their own approach and will look to get a balance between portfolio activity and costs . However , for advisers and investors , finding out about total costs can still be challenging but it is worth investigating . If there was a comparison website for investments along the lines of Compare the Market etc , I am sure that it would show some interesting results . So , when looking at value ( over and above the growth versus value debate ) and what it means , I would encourage advisers and investors to look at the total cost relative to the returns of a strategy . What percentage of returns are being paid in fees and costs ? This means looking at the AMC and the cost of the underlying funds , as differences here can make a material difference to the overall outcome for a client – that is where passive funds have a real role to play in delivering value within an actively managed portfolio . As Warren Buffett said : “ Price is what you pay , value is what you get ”.
1
Sources for academic studies :
• Brinson , Hood & Beebower : Determinants of Portfolio Performance , 1986
• Ibbotson & Kaplan : Does asset allocation policy explain 40 , 90 , or 100 percent of performance ?, 2000
• Davis , Kinniry & Sheay : The Asset Allocation Debate : Provocative Questions , Enduring Realities , 2007
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