“You know we were talking last week about the next really big retail investment scandal-in-waiting?” asked the chairman of the impermissibly-sized investment company, Second Coming Asset Management, as we enjoyed a pint or two of Shock Horror Private Equity Can Be Illiquid at The Next Thing You Know They’ll Be Saying Beer Gets You Drunk.
“Please don’t start off our conversations like that,” I sighed. “You know it makes me nervous.” “I can’t imagine why,” snorted the chairman. “Anyway, it got me thinking about our suite of theoretically cautious smoothly smooth investment offerings – the Archetypically Crummy range. You know the ones I’m talking about.”
“I do indeed,” I said. “You ran that curiously retro, 1980s-style ad campaign, which seemed to consist purely of pretty ladies suggesting that, to their way of thinking, the sexiest thing on the planet was a diversified portfolio that offered smoothly upward returns, come rain or shine. But please don’t tell me there’s been anything untoward going on there.”
“Definitely not,” said the chairman firmly. “I don’t think either of us would suggest there’s been even an ounce of bad behaviour with any of our Architecturally Crumbling range. Everything we’ve done has been completely within – or at the very least to – the letter of the law…but it got me thinking.”
“Oh dear,” I thought. “Oh really?” I said. “Yes,” said the chairman. “Take our innovative asset allocation approach, for example. Investors want diversification but that’s just not a given any more with the traditional range of assets. Yet that didn’t stop us persevering and eventually our boffins came up with the 30% portion of the portfolio with no correlation whatsoever with any other asset class.”
“Because you invested in sharks,” I pointed out.
“Precisely,” nodded the chairman enthusiastically. “Do you know what the correlation is between a corporate bond and a Great White? Seriously, the maths barely exists to come up with the figure.” “There may be a reason for that,” I suggested but the chairman wasn’t listening.
“Then there’s the question of presentation,” he continued. “I accept that the shark portion of the portfolio, while undeniably a piece of diversificational genius, isn’t the most low-risk strategy in the world but it doesn’t matter. If we say the objective of the fund is perfect for the Cautious Managed sector there’s nothing the IMA or anyone else can do about it.
“Now, here comes the good bit. Once the fund’s labelled as ‘cautious’, there are enough people out there who are prepared to take that on trust rather than doing a little due-diligence of their own – and that includes some professionals. You see, it’s all about innovation – people just love new and shiny toys. They can’t help themselves.
“Forget that our entire financial system has been brought to its knees by the undeniably innovative but wholly inadequate products the investment banks have dreamt up over the last five years – nobody’s learnt anything. You see, what I love about investment is that, at heart, it’s really very simple and the basics don’t change.
“So, know your attitude to risk, why you’re investing and for how long. Work out a sensible asset allocation strategy that fits and then review things every year or so. A little more often than you’d think, a black swan will come and mess you around but, if you’ve done those few simple things, there’s nothing to be ashamed of.
“But, as I say, investors never learn – and God love them for it otherwise I might simply be loaded, rather than richer than Croesus. I guess what I’m saying – and I can’t believe it’s taken me until this stage of my career to grasp the concept fully – is that investors will buy anything. Not all investors, of course, but enough and that’s why I’m so excited about our next launch – the Scam Ponzi Fund.
“We’ll be totally upfront with our fund objective – to pay existing investors good returns out of new fund inflows – and I guarantee there’ll be takers. It’ll be innovative, the returns will be terrifically smooth – at least to begin with – and it’ll do exactly what it says on the tin. Who could possibly resist?”