The latest investment fund offering from a company called Source, whose web site prattles on about something called Smart Beta, only serves to highlight to us the growing disconnect between investors and their investments. An investment maxim, followed by most of the great investors, was to always ‘invest in what you know’. Unfortunately, in today’s jargon filled investment arena most private investors probably haven’t a clue what they have actually invested in, given the growing prevalence of some bizarre Exchange Traded Funds (‘ETFs’), Structured Products etc. Wouldn’t it be better for investors to have a better understanding of what they were investing in and connect once again with their investments?

Source is yet another provider of ETFs whose product range includes a vast number of collective investment schemes following a diverse number of passive strategies, across sectors, regions, indices, commodities, currencies etc. So rather than invest in something the average person could mildly understand, like a ‘well-known’ index, they invest in baskets of stocks, bonds, or good knows what, largely around some newly created passive index of their own making.

We are all for index investing, which was originally intended to mean passive funds based on leading stock market indices, but, in creating an ever growing number of index based strategies, the financial services industry has managed to complicate a previously simple concept; now that’s a change!

• Do private client managers outperform?

While many funds are criticised for underperforming the benchmark indices, we believe that many private client portfolios investing in direct equities with much broader investment mandates consistently outperform. Furthermore, with a full knowledge of every stock they hold, clients know exactly how their performance has been achieved.

Direct investment in equities and bonds means private investors have a full understanding of what they are holding. The ease of investing globally also means that private investors can easily build a nicely balance portfolio that isn’t geographically constrained.

• AIM for IHT planning offers plenty of attractions for the private investor

Investing in AIM quoted companies for inheritance tax planning purposes necessitates investors holding the shares directly and not via a fund vehicle. This way investors get to know all of their holdings rather than the top 10 holdings of some bland fund, which is usually the case.

It therefore seems foolish for private investors (of more mature years in particular), to gain exposure to this exciting and high performing investment arena via investment funds. In adopting a fund approach private investors would fail to benefit from the attractive inheritance tax breaks that are only available via direct investment. The less liquid nature of small and micro-cap companies also means that funds have much greater difficulty buying and selling in this arena. Investors would also miss out on being better connected with some enticing high growth companies, some of which could be the blue chips of the future!

 

We advocate investing in what you know and there are plenty of terrific little companies on AIM to know more about!