Benchmarks and Trust
We all know that the Holy Grail for investors is a high return product that has zero risk to their funds. But we also know that doesn’t exist, despite trying the best we can as fund managers to get as humanly close to this as possible.
With increasing uncertainty in the world it is little wonder investors are looking for lower risk options for their money. The recent rises in gold price over the past 12 months from $1,198/oz to $1528/oz, are indicative of investor sentiment. This is also reflected in recent spikes in gold on the back of the Saudi Arabia oil infrastructure attacks on September 23rd. It has fallen back a little as tensions in the Gulf look to be easing slightly but remains above $1,520 for now, according to data from BullionVault.
Safe-haven currencies have been boosted as well, with the US dollar, Japanese yen and Swiss franc all strengthening on the back of the US-China trade war, Brexit uncertainty and a slowdown in the global economy, with Germany – Europe’s economic powerhouse – on the brink of recession.
So, it is little wonder with all of this and more going on in the wider world that investors are looking for some lower risk investments. Money has been flowing into bond funds at the highest rate since the financial crisis, as investors look for safer havens. In the first six months of the year, almost US$500 billion has gone into fixed income products according to figures from Morningstar. That is up from US$148 billion in the first half of 2018.
This is in turn leading to the launch of new bond funds, including one from Blackheath, to accommodate the increased search for yield. This trend is seen elsewhere as well with Artemis launching a new corporate bond fund and high yield bond run by former Kames fund managers Stephen Snowden and David Ennett as reported in Investment Week.
However, each fund will use market indices as a benchmark rather than the more traditional peer-group relative benchmark because this provides a greater deal of transparency for investors and is the preferred method of the regulator.
The Financial Conduct Authority is seeking to improve transparency in fund management and has laid out rules and guidelines on how asset managers use benchmarks to assess performance and how this is explained to investors. New funds had to comply with the rules from May 7, existing funds by August 7.
The aim is to ensure that when investors are researching funds for potential investment the published relative performance of those funds has the most relevant and the most transparent benchmark to compare them against. Chosen benchmarks need to be clearly outlined and the same in all documentation, and the performance against those must also be clearly presented.
The problem with using a wide variety of non-comparable benchmarks for bond funds has been that what the investor will see is a high return relative to a benchmark that may or may not be entirely relevant. Once they see a higher return, investors are more likely to invest, even though we all know that past performance is no guide to the future and even more importantly against another benchmark that performance could be called into question.
These new levels of transparency will go a long way to helping investors understand what it is they are putting money into, and to some extent will also help those looking to seed bond funds as well. Transparency in data is an essential component to encouraging investors to invest in your fund and that transparency will help generate a level of trust between manager and investor which has been neglected in recent times
Please get in touch with Blackheath Capital on +44 (0) 20 3880 6640 or by email on info@blackheathcapital.com should you have any queries on any of our own funds or regulatory services.
Blackheath Capital is also raising funds for its own Dublin-based Global Income Fund, and anyone who is interested in finding out more about the fund or providing seed capital at this time can get in touch with us on the details above.
