Just think for a while about what fundamental characteristics that you and many other investors would want and need from an investment product. This should help you focus on what really matters when choosing a product.
Such back-to-basics thinking may reduce the common temptation to choose investment funds mainly based on their latest performance.
A recent research paper that seeks to identify the characteristics a "desirable" investment product provides some useful pointers.
The Personal Investments Market Projections 2016 report, published by actuaries and consultants Rice Warner, names four characteristics of desirable products: transparency (of investment costs, underlying assets and investment management), tax efficiency, cost efficiency and convenience.
The report comments that investors have become "generally more particular and careful" with their investments since the global financial crisis (GFC), reassessing the risk-return trade-off and their capacity to absorb risk.
"Investors are increasingly focussed on what they can see and what they can measure," the report’s authors add.
Transparency
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Transparency of investment costs: "Investors are better equipped to assess the value of the advice they receive they can clearly see the costs of advice, execution and administration," Rice Warner comments. A key reason why many actively-managed funds underperform market indices is the size of their investment management fees. Costs are a big factor in achieving investment success – or otherwise.
- Transparency of underlying assets: In short, investors should know how their money is being invested. This is critical for understanding the risks involved and for setting an appropriate asset allocation for an overall portfolio.
- Transparency of investment management: "Investors need to know the decision-making processes, philosophies of managers, and how to enter and exist investments when needed," Rice Warner emphasises. Again, this is part of knowing where your money is being invested and the risks involved.
Tax efficiency
Given the high cost of tax, investment products that manage tax efficiently can be highly attractive to investors; particularly those paying tax at the highest marginal rate.
Cost efficiency
Investment costs should be transparent, as mentioned earlier, and as low as possible. In short, high costs really handicap real returns.
As reflected in the burgeoning popularity of low-cost index fund investing, including through index-tracking Exchange Traded Funds (ETFs), many more investors regard low investment management fees as a critical feature when choosing a fund.
Convenience
Investors are increasing seeking "seamless integration" of their managed funds, ETFs, direct equities and cash facilities, Rice Warner comments. "Highly-functional online services are available for personal banking, and investors are increasingly demanding equivalent service for their investments."
Rice Warner expects that investors seeking the characteristics of a "desirable" investment product, as set out in its research paper, will have a significant influence on the development of the personal non-super investment market over coming years.
Forces that will drive the personal investment markets in the future are continuing downward pressure on investment management fees, greater transparency of investment products and "relentless" technological advances improving investor services.
The growing popularity of ETFs, for instance, reflects what is being demanded by investors from their investment products given the characteristic ETF features of low-costs, transparency, convenience in trading and gaining exposure to chosen markets for portfolio diversification, and use of technology.
Rice Warner expects that ETF assets will continue to "surge, in tandem with an increase in allocations to low-cost, passively-managed investments".
How do the investment products in your portfolio measure up in regards to their transparency, tax efficiency, cost efficiency and convenience?
