Why Investing Problems Need Simple Solutions

EDITOR'S VIEWS: This week senior editor Holly Black looks at the merits of long-term asset funds, India's growth story and Morningstar's new ETF series

Holly Black 28 June, 2019 | 9:04AM
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I’m definitely not the only person who thinks the Investment Association is wasting its time with the launch of the new Long-Term Asset Fund.

No Incentive for Investors

Aside from being a fantastic example of shutting the stable door after the horse has well and truly bolted (which may well just be a case of unfortunate timing) there is one question screaming out from the proposals: what’s in it for investors?

Why would an investor agree to lock up their money for months at a time in order to access illiquid investments when they could just use an investment trust?

Not only does the notion of monthly or quarterly trading fundamentally not solve the problem with holding unquoted companies and other illiquid assets in an open-ended fund (these things can take significantly longer to sell and there could still be a run on a fund on its designated trading day), there is absolutely no incentive for investors to choose this structure when an existing one is already doing a fine job.

It’s the same when you choose a cash savings account. You might get 1% interest on an easy-access account, or you could tie up your money for 12 months to get 1.1%. I'd wager most people would prefer the flexibility over a few pennies more in interest.

That’s the best analogy I can think of, but long-term asset funds won’t even be able to dangle the proverbial carrot of being able to deliver better returns than a closed-end fund.

The IA should be praised for trying to think outside of the box and attempting to be innovative, but this complicated proposal flies in the face of what investors really want: transparency, flexibility and, above all, simplicity.

A Good Story

Investing is, ultimately, about stories and finding those you believe in. If you’re investing for the long-term (as you should be) you need to find something you believe will stand the test of time.

India has been a story that has caught the attention of investors in recent years. It’s a fascinating, fast-growing economy undergoing an incredible period of structural change. The re-election of Prime Minister Modi should bring further developments to this burgeoning nation.

And at the heart of it is a story: one of an increasingly wealthy population, with a growing middle class, embracing innovation and technological change.

Now, that’s the sort of fairy tale I can get on board with.

Geeking Out

We’ve had a delightfully geeky chat in the office this week about just how much we’re enjoying the ETF Due Diligence Series (head here if you’ve not seen it yet).

Tracker funds are becoming increasingly popular for myriad reasons, not least their low cost and relative simplicity. But when there are thousands of products all promising to do exactly the same thing, how is anyone supposed to pick between them?

There are more than 100 ETFs listed on Morningstar alone all aiming to track the FTSE 100 in one way or another. You might as well just close your eyes and point rather than try to work out the difference between some of these products.

But understanding a bit more about various provider’s strengths and specialisms, their stewardship efforts and replication methods will certainly help me whittle down my options. We’ve got five more providers left to look at in the series, if you’re keen to know more.

And just to reassure anyone concerned about the calibre of chat here at Morningstar HQ, other highbrow conversations this week have included: “Could a debit card actually spontaneously combust in your pocket?” and “Why do they still make Diet Coke when there’s Coke Zero?”

Actually, maybe we should just stick to talking about ETFs.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk