Sceptical Analysis – Part 2

We recently wrote a blog which highlighted our approach of having a sceptical point of view when looking at financial products.  Often financial product providers will try and use flashy brochures, marketing tools and advertising techniques to sell their offering, as opposed to providing a clear understanding to the consumer on why they would be better off in using their product.

The following is a specific analysis of a financial product that was awarded the Professional Planner/ Zenith Multi Asset: Real Return Award for 2014, being the MLC Inflation Plus Portfolio series.

To give some insight as too what it means to be considered for the category of Multi Asset: Real Return, the following is an excerpt from the Professional Planner magazine (issue 70, Novemeber 2014);

A recently created category within our multi-asset sector, Zenith has observed considerable investor interest in this market segment, as evidenced through the proliferation of new offerings and material fund flows.  With an emphasis on absolute outcomes and the generation of returns in excess of inflation, funds in this category operate with a broad investment mandate and without reference to a targeted asset mix.  With asset allocations permitted to be altered on a frequent and material basis in response to forecast changes in market conditions, Zenith believes these funds are well positioned to take advantage of an ever dynamic investment landscape.

Our Analysis

The Award: Professional Planner/Zenith Fund awards 2014 (Best of Breed)

(As you will note from above, Professional Planner is a financial industry publication.  Zenith  is a research house, and was awarded Money Management’s Research House of the Year for 2014).

The longest standing fund within the MLC series is the MLC Assertive Portfolio which has been in existence since 2006 (as MLC Long Term Absolute Return Portfolio).

This portfolio is the only fund within this series to have some historic data, having commenced on the 4th of December 2006.

According to MLC, the Inflation Plus-Assertive Portfolio aims to deliver returns of 6%p.a. above inflation (before fees and tax) over 7 year periods.

Comment

When designing new products, fund managers need to be clear about their product objectives.  In order to promote their new offering to the end user, the investor, they need to state product objectives and the appropriate benchmark or other acceptable and clearly measurable performance target.  The asset allocation will be indicative of risk taken by the manager and the targeted performance must provide the appropriate reward for taken risk over a specified time.

In this case, MLC has given itself a very broad and index averse (real return/absolute return) benchmark. The targeted objective being performance of CPI + 6% p.a. indicates significant confidence in their management style and ability. The fund manager and in this case the research house, must have full confidence in the active style of asset management

The Facts

Average inflation rate since 2006: 2.7% p.a.

Fund indicative investment fee 1.31% p.a. (other fees may apply to investment-platform, advisor).

Performance target of 8.7% p.a. (6% plus 2.7% inflation) over 7 years.

Fund Performance since inception to date (31 Oct.2014) 4.4%p.a. (after management fees).

Adding back management fees of 1.31%, the fund has underperformed its targeted returns by 2.99%p.a. (Targeted gross 8.70% p.a. – achieved gross 5.71%).

This represents a 50% p.a. under performance for 8 years based on their stated objective.

Conclusion

Designing financial products to achieve forecasted outcomes based on variables such as future market performance, inflation and interest rates, is an unrealistic objective.

It is one thing to have an investment performance objective and work towards it, it is entirely another and far more risky proposition to base your future lifestyle expectations on such hypothetical and chancy outcomes.