Excessive
number of products requires scrutiny
If you had
to guess how many investment funds were available for sale, what number would
you pick? The latest data from Morningstar shows a grand total of 4,381 –
including mutual funds, segregated funds, and some pooled funds. That’s a
staggering figure when you consider that there are a number of funds they
simply don’t track. We know why firms launch new funds (i.e. to make money) but
I say the current trend of product consolidation among investment fund sponsors
has a long way to go.
The
investment industry is very innovative. As soon as it figures out people want
something, they deliver. When brokers realized many years ago that investors
couldn’t reinvest small coupon interest payments from conventional bonds, it
“stripped” the interest coupons from the principal value, and sold them
separately – thereby getting rid of the reinvestment problem.
In the
mutual fund world, innovations like funds using index futures (i.e. TD U.S. RSP
Index) and swaps (i.e. clone funds like Ivy RSP Foreign Equity) fed investors’
hunger to exceed foreign content limits.
Most of the
innovations are great, but sometimes the marketing departments get a little out
of hand. Take investors’ infatuation with investments that aim to pay out fat
cash flows to investors as an example.
Some of the
products are better than others. Based on my conversations with many industry
people, I have reason to believe (not a known fact) that there have been more
than a few instances where so-called “high income” funds were launched with
monthly cash payouts set by marketing executives.
This makes
no sense. It should be marketing departments asking the investment managers
what target they think is feasible. But in a time where few funds are
attracting new money, money managers are under pressure to assume mandates with
which they aren’t comfortable in many instances.
Hedge funds
are another prime example. Firms that had never offered hedge funds in the past
suddenly launched products because they’re a growth area of the money
management business.
Some firms
have launched quality products by setting up the hedge fund and hiring an
experienced manager (or team thereof) to actually manage the money. And then
there are some that take the cheap route – take a money manager with lots of
experience (though little or none of it in hedge funds) and tell her to start
managing a long/short fund. However, this is the result of firms rushing
products out the door while a certain segment is hot just to get a piece of the
action.
In so
doing, the industry has further confused its clients and tossed out a lot of
inferior products for people to buy. Many investment products are nothing more
than frogs dressed up like princes. Trouble is, investors don’t figure this out
until they bring the frog home.
I know I’m
guilty of being labeled an industry cynic, but I truly believe there are lots
of great investment products available for individuals. There are more than
four thousand investment funds in Canada. Even if I said 90 per cent of them
weren’t worthy of your investment dollars; that would still leave a full 400
funds from which to choose.
Aside from
criticizing the very industry from which I derive my living, the point of this
article is to remind investors to look beyond an investment’s packaging. I
admit to being a skeptic, but a little skepticism is healthy because it
triggers questions. With so many funds and other investment products for sale,
many will not be worth a look.
The more
you ask questions, the more you’ll learn and empower yourself to sniff out some
of the garbage.
Next week,
I’ll review some good, basic questions to ask when an investment is proposed to
you.
Back in
May, I wrote about a controversial proposal (http://www.sterlingmutuals.com/Telus_DynVote_17may2002.htm)
to raise mutual fund fees that Dynamic had tabled for a unitholder vote. I’m
sad to say that the proposal passed. I can only guess that too few affected
investors knew or understood the impact of passing the proposals. Investors
must read voting information circulars so that they exercise their legal rights
to vote on decisions that impact their money.
Dan Hallett, B.Comm., CFP, CFA is the Senior
Investment Analyst with Sterling Mutuals Inc. He can be reached at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, Alberta, and Manitoba.