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Fashion & Investments - What stands the test of time?

Fashion & Investments - What stands the test of time?

With London Fashion Week kicking off and models preparing to sweep down the catwalks to reveal the latest “look” in designer clothing, it’s a reminder that the buzz and hype that often surrounds new things isn’t confined to the rag trade.

In fact the investment world is notoriously prone to waves of fashion, as firms innovate to capitalise on either a seemingly compelling investment theme or a distinctive sales idea. These invariably prompt a wave of me-too copycat products and investors inevitably get lured in by the hype.

Of course some of these waves of product innovation will stand the test of time and become permanent or longstanding fixtures on the investment landscape. But it is also the case that others will go the same way as the Ra Ra skirt or platform shoes.

So, I’ve decided to reveal my inner Gok Wan, and cover a few examples of fads in the investment world:

Privatisation funds

The mid-90s saw the emergence of a handful of investment vehicles that promised to capitalise on an expected torrent of privatisation across the globe as countries far and wide followed the example of the Thatcherite Revolution. These included two large investment trust launches. However, within time the privatisation funds had morphed into ones with more generalised mandates to invest in global or European equities as the steam ran out of the privatisation theme.

Technology and internet funds

In the run up to the millennium and the earlier part of the 21st century, Technology, Media and Telecom companies experienced astronomical share price growth as “dot com” fever gathered pace and fund managers waxed lyrical about a “New Investment Paradigm” that meant traditional methods of valuing companies didn’t count. I recall one tech fund manager telling me that the right price to pay for a particular large company was “any price”.  Of course this all ended up in tears as the bubble burst and many investors who had been swept up by the excitement suffered heavy losses on their technology funds. A handful of funds survive today.

BRIC funds

In 2001 Jim O’Neill of Goldman Sachs coined the acronym BRICs to describe the four emerging economic superpowers of Brazil, Russia, India and China. This was followed in due course by funds that sought to focus primarily on these economies. Yesterday’s future superpowers now look more like supernova’s – stars that are imploding – with Brazil dogged by recession and corruption scandals, Russia a pariah state under international sanctions and crippled by its overreliance on oil and gas, and China clouded by concerns around its ballooning debt mountain, excessive exposure to exports and deteriorating demographic profile. Amongst the BRIC economies, India alone remains a relative bright spot.

130/30 or ‘long-short extension’ funds

Also known as a ‘long-short extension” or ‘enhanced alpha’ funds, these were heralded as ground breaking products that would enable fund managers to supercharge returns by using a proportion of their fund to short-sell stocks (say 30%) that they were negative on and then using the proceeds from those short positions to invest more heavily in stocks they liked in effect gearing up their top bets to 130%.  A raft of such funds were launched in 2007. While some have survived, others were crushed in the ensuing global financial crisis when trading liquidity dried up.

Climate change funds

Funds that would capitalise on the theme of climate change began launching with regularity in 2007. These funds promised to deliver returns from businesses involved in mitigation and adaption to the theme of global warming and a shift to a low carbon economy. These included areas such as renewable energy and efficiency, agriculture and healthcare. Such funds never gained real traction with retail investors as concerns around grand long-term themes were eclipsed by the hard realities of the financial crisis. Weak fossil fuel and commodity prices and excess supply of oil have also diminished interest in more expensive renewable energy.

Targeted absolute return funds

Changes to fund regulations several years back handed a wider range of powers to fund managers, including the chance to use sophisticated techniques that traditionally had been more associated with the world of hedge funds. Funds that held out the prospect of generating positive returns across different market environments arguably represented an investment nirvana for investors – but traditional fund management groups undoubtedly also saw them as a means to retain talented fund managers who might otherwise have crept off to the lucrative hedge fund world.

In reality this has been an area of some successes but also many disappointments. The huge commercial success enjoyed by Standard Life Investments with its flagship Global Absolute Return Strategies fund has spawned a wave of rivals. Yet a great many “Targeted Absolute Return” funds have disappointed over a period when massive Central bank stimulus programmes have pushed stock and bond markets higher, diminishing the scope for making returns from calculated bets between asset classes or shorting stocks. However, as stock and bond markets are now looking expensive and a sense is growing that such Central banks are operating at the limits of such stimulus policies, growing caution among investors means the more successful of these funds are still finding interest with investors.

Risk-targeted multi-asset funds

The UK regulatory environment has increased the emphasis on the ongoing suitability of investments that advisers have put in place for their clients, so many firms of financial advisers have now moved away from building portfolios for their client themselves and instead use multi-asset funds that match particular risk profiles as their core investment solution. In particular, there has been strong growth in risk-targeted multi-asset funds which are designed to broadly align with the asset allocation models generated by popular risk-profiling services widely used by financial advisers so that the funds held by clients will continue to adhere the risk profile the financial adviser selected for them. While some will question whether these will lead to less differentiation as so many advisers are applying similar asset allocation models, and an increasing number of these funds also use passive investments, this looks set to be a lasting feature of the investment world given the regulatory backdrop that has given rise to this trend.

Smart beta

‘Smart beta’ is without doubt the hottest product concept strutting down the catwalks of the investment world at the moment – though many providers eschew this label in favour of terms such as ‘factor investing’ or ‘rearranged index’ investing. It covers a wide range of product innovations, mainly in the rapidly expanding Exchange Trade Funds market. These are funds that take the attributes of passive investing – by removing human judgement in selecting underlying investments and in doing so keep costs low – but apply more sophisticated criteria to how a basket of investments is constructed than traditional index trackers which weight exposure merely on the relative size of companies. Smart beta funds might create baskets or indices of shares or bonds based on income distributions, valuations, financial strength or how volatile they are – or combinations of factors. Undoubtedly in vogue, we think these types of investments are set to become an enduring feature of the investment world rather than a bell-bottom phenomenon. Time will tell if we are right.

This list of course isn’t exhaustive and you could definitely lump into this the emergence of Strategic Bond funds, the commercial property trust boom and infrastructure. While new themes can become durable, a degree of healthy scepticism towards the latest investment fads is no bad thing. Sometimes it may be better to stick with what is tried and tested rather than get caught up in the hype. On that note, I must pop into Marks & Spencers for some new socks.

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