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What do you want?

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11 February 2019

David Prosser reminds us that it is important to remember our individual needs when picking investment companies.

What do people want from their investments? The question is motivated by a recent Mail on Sunday feature on investment companies yielding more than 5 per cent a year – or, more specifically, a handful of readers’ online comments posted underneath it. A number of these comments questioned the wisdom of investing in some of the funds mentioned, which hadn’t posted sector-topping capital performance, or in some cases had even seen their share prices fall.

To which it is tempting to remind people that they can’t usually have their cake and eat it. The investment funds featured all posted competitive total returns, which is hardly surprising given that while stock markets have been volatile, they have consistently offered an income worth more than 5 per cent a year.

For investors choosing to reinvest this income, performance has been handsome, with the yield compensating for the relative paucity of capital gain. For those who have banked the income, capital performance looks much less attractive – but they’ve had the benefit of an income stream worth around five times’ more than they could have earned from a bank or building society savings account.

The point here is that when we talk about returns in the abstract, we forget that investors are real people who make decisions about where to allocate their savings and investments according to their needs.

Investors who need their portfolios to generate income have been well-served by these funds in recent years. So too, in fact, have been growth-oriented investors, as long as they reinvested their income back into the funds. Clearly, you’ll be sitting less pretty if what you wanted was capital growth, but you took the income in any case. But it’s a bit of a stretch to blame the fund itself for that outturn.

All of which is to say that investors need to learn something that advisers already know – there’s more to choosing a portfolio of investments than checking the past performance data.

If that sounds like a statement of the obvious, it’s amazing how often we fall into the trap of ignoring it. Media coverage of investment funds tends to gravitate towards performance league tables. We bombard the managers of funds at the top of these tables with bouquets, while chucking brickbats at the supposed also-rans.

Yet what investors need is a fund that is appropriate to their needs. That might be a fund generating consistent income they can rely on. It might be a fund with a more defensive view of the world, reflecting their attitude to risk or time horizons. It might even be a fund focused on outsized long-term capital gains and accepting of high levels of short-term volatility. A single performance table often includes all of these funds, but comparisons between them are meaningless.

It’s a hard lesson for investors to learn. When advisers suggest an investment company that doesn’t subsequently top the charts, it’s easy to assume it was a duff recommendation. Conversations about why a fund is the right one for someone’s individual needs are more difficult than pointing to a league table, but we’re going to need to get better at having them.

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