A Tale of Complex Investment

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26 Jun A Tale of Complex Investment

A recent article in the Guardian highlights one of the major failings of the investment management industry: the Standard Life GARS fund The largest actively-managed fund in the UK manages over £20billion in assets, however its ‘ridiculously complex’ structure has undermined its value.

Over the past five years, not only has the actively managed fund in question underperformed its own benchmark, it has also underperformed the UK and global stock markets.

This particular example of faulty financial engineering, was initially hailed for its sophisticated usage of ‘alternative strategies,’ which in essence are bets against equity markets using derivatives. This can be useful in the event of an equity market downturn. The trouble with GARS was that it promised stock market-like returns (cash plus 5% a year) for taking a cash-like risk, in all market conditions! Needless to say, it has failed miserably.

Its complexity even managed to confuse industry experts and so what possible chance would the average investor have had? Legendary investor Warren Buffet once admonished us to “never invest in a business you cannot understand” and this statement most certainly holds true when it comes to GARS.

After the departure of its fund manager, the fund fell into decline, during which time successive managers failed to right the ship. The complexity of this financial vessel certainly hasn’t helped. And so, the story of GARS presents another valuable lesson: Investors who place their faith and money in active managers’ hands also bear the risk of any career changes they might make. The more complex the strategy, the harder it becomes to maintain consistent outcomes when the manager leaves.

In general, the investment industry loves complexity, driven by the twisted belief that complexity should earn a higher fee! But complexity often yields worse results for clients.

One of main objectives at Tandem is to keep our investment process as simple as possible. We do not invest in anything we do not understand, and we certainly avoid anything that our clients have no hope of understanding.