"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." - Warren Buffett
A manifesto is a published declaration of the intentions, motives or views of the writer where they say what their aims and policies are. We need more of them in financial markets, with actions to match the words.
What concerned me most over 2018 was how quickly the skepticism of members of superannuation funds morphed into cynicism. Like purveyors of medical treatments, we 'professionals' in the finance industry hold an economic advantage over members due mainly to information symmetry. How we exercise this advantage defines our professional integrity. This is as true for fund managers as it is for pension and superannuation funds and all other intermediaries such as financial advisers.
Here are five simple points on a potential manifesto towards better investor ethics:
1. Never sell a fund or investment vehicle which you would not sell to your parents, siblings or children. If you have a problem selling to loved ones, then why sell it to the broader market?
2. Assume it’s your money you’re investing. Caveat emptor should not only relate to your own monetary capital, but equally to your intellectual and ethical capital.
3. Stop creating marketing verbiage to impress others. For example, what the hell is an 'Absolute Return Fund'? Use the same words you would say at a BBQ when asked what you do or how you manage money.
4. Don't pretend your product can do something it can't. There is no such thing as asymmetrical risk. No one can build a portfolio which is top quartile in bull markets and beat cash during the bear.
5. When a peer breaks any of these aforementioned four points, then call them out on it. Much of our complacency lies from our not wanting to 'rock the boat'. Ironically, we are all in the same boat.
These rules should apply to anyone who relies on OPM, or other peoples' money.
With the recent release of Productivity Commission Report into Superannuation, a few more words to guide the design of a manifesto:
1. It’s not all about fees. While no one wants to be overcharged, the truth is that it’s all about net returns. That is, returns minus fees, where consistent outperformance is worth paying for.
2. Bigger super is not necessarily better. Economies of scale do capture benefits for members, but in the search for performance, large funds can equally have diseconomies of scale. Plus, any systematic failure has an air of 'too big to fail' moral hazard to it.
3. Default funds should not be limited to a few historically best-performing funds. I guess the authors of the Report have never heard of mean reversion. I believe immunisation (where assets are designed to match liabilities) is a more important target for a super and pension fund. When I was a manager, return-based fund awards scared me as more often than not, the funds that won awards would likely mean revert in a following period. I never met a portfolio manager whose stock selection criteria was based on the historically best-performing large cap names with low margins. Yet it seems fine for members to choose their super funds accordingly.
Rob Prugue has over 30 years in funds management; from market regulator, to investment analyst and manager, to pension manager, to asset consultant and, most recently, as a CEO of Asia Pacific at Lazard Asset Management. These opinions are his own, and stem for his 30+ years experience. Rob will soon come to the end of a one-year sabbatical, and would be an ideal resource for any business considering these issues.