Author: Paul Hogg, 8AM Global
How often does MPS packaging override investors common sense?
A wise man…well, the author’s father….once (often, repeatedly, ad nauseum, etc) said that buying high-end fashion labels was a “triumph of packaging over common sense”. It’s wise, and also almost undoubtedly borrowed from someone with true, original wisdom. And indeed it’s a thread that runs through the selection of any product or service since the dawn of late-stage capitalism.
MPS Bingo
Anyone for non-committal, broad investment terminology bingo?
“Robust investment process”. “Experienced team”. “Long-term risk-adjusted returns”. “Diversified across asset classes”. “Adviser-centric”. “Client-centric”. “Transparent”. “Consumer Duty aligned”. “High conviction”. “Process-driven”. “Systematic” and finally…”Evidence-based!”
Heritage-based branding, multi-hundred year history, “we were generating alpha when your great grandad’s great grandad’s five year old was cleaning chimneys.”
Here’s our hot take: it generally means nothing. Well, less ‘it means nothing’ and more ‘it tells you nothing of value’.
Generally the bingo card will not be filled with robust data about why this solution is different and thus, in a cost-pressured market and, increasingly, a value-pressured market and justifying to the regulator why your clients are paying for it.
Homepages across the MPS space are pockmarked with words like those above.
This is not a coincidence, nor one of apathy. It is a structural one. When a market matures and fees compress, providers converge on the same vocabulary because they are, increasingly, competing on the same things and genuinely, honestly and with no malice struggling to differentiate. Perhaps not feeling the need to.
The Core Issue
Then look at the hard data. A quick check of over 1500 models from just shy of 80 providers in one aggregated data provider and you’ll find that the vast majority are selecting from the same list of passives, or behemoth actives (often closet trackers).
We know asset allocation is a primary driver of returns, although we do think there’s a healthy aspect of that stat that is down to it simply having to be true, because active alpha generation has been so historically poor (surely studies have controlled for that, though?)
Anyway, we digress…
Asset allocation is indisputably a key driver of returns. And we can, from the above truths, infer that if holdings are largely drawn from the same pool, you’re buying on – and MPS providers are competing on – asset allocation among one or two other key areas, more on which later.
Now, asset allocation is….or should be….. a function of construction, of approach and/or of ethos.
Put simply, how the MPS provider invests. What do they stand for? Is it investment passion first; ability to make money at scale second.
And, by the way, we’re under no illusions that we and everyone else are in this as a commercial enterprise too. In case you were thinking “the naivety is strong in this one”.
But that’s why the above word salad about team credentials, long-term returns, blue-chip this and highly liquid that tells you not very much at all.
True Differentiation
Back to common sense.
How do you bring it to the CIP/CRP construction process? How do you select a truly different provider – and does that matter?
Well, there are genuinely different MPS propositions. Some providers run money with a level of active conviction that looks nothing like principled, low-cost passivity or a way of making money at scale and to hell with alpha. Those are meaningfully distinct approaches and, if you’ll permit us to be direct, an adviser who understands the difference is doing their job properly.
Quite a bit of conceptual talk to this point, and not much of practical use…
Here’s question we’d ask prospective new MPS provider: “Tell us how you are different – take as long as you need”.
Specialist subject: The Bleedin’ Obvious – surely their whole spiel will revolve around differentiation? Not always – usually a huge volume of time is spent attempting to justify their ‘normalcy’ and that they can be trusted. This is a pretty standard response as they don’t want to scare you off by being too contrarian – let them know that the trust comes later!
List to the response (sans buzzwords) – you’ll get closer to what you need as good managers/teams will be activated by the permission to speak passionately about what they (in theory) care about!
We would want to hear these points being satisfied, and of course these are also form the basis for a deeper look under the bonnet:
- You feel they live and breathe the science/art of investing.
This is your gut feel. You know when someone lives in their field. And if allied with positive answers to the below, too, then you’ve got a good chance of the right pick.
- There is genuine structural difference in their portfolio construction.
These guys are not tracking MSCI World, IA Global, IA Mixed X or Y from the closet.
They probably won’t mention benchmarks until later in the piece. They certainly aren’t explaining their construction to you in benchmark plus-or-minus terms and telling you it is conviction.
- (Related to 2) There is an ethos, backed empirically and by real-world returns.
There are kernels of strategy woven throughout what they say and how they present that are different.
At 8AM, for example, we absolutely know, provably, that some managers do outperform but that they do not do so for more than 36m on average and that one must systematically, emotionlessly divest of those, whilst attempting to identify them early in their alpha cycle. We have refined our proprietary approach to doing just that and can do it repeatedly and without bias or becoming beholden to reputations.
Given we can do that, we do not have to track, sample, build with 500+ holdings and bang it in a shiny box with a crest on it.
- Does price reflect not just the returns, not just the service levels (both of which are important), but the true underlying differences, and are those differences able to be couched in value?
“Couched in value”, hmm, what does that mean?
Well, yes, returns, of course returns, but also:
- The behaviour of the portfolio in times of market stress.
- The proactivity with which the portfolios are managed on behalf of your paying clients.
- The basis points attributable to genuine differentiation.
- Genuine differentiation that drives alpha.
- The ability to explain why each and every holding is in there at any given time.
- The governance framework.
- A genuinely proactive communication approach.
Not just “it goes up when markets are up by about what the market does, same on the way down, in the bad times you’ll be having hard conversations, in the good times you’ll be having nice ones, and everything’s fair in the final shakeup.”
We must move beyond that.
Going back to the earlier analogy, the packaging is brand + the investor word salad; the common sense to align product with client interest and objective is yours.
Over the coming weeks, we’ll be developing this argument with a view towards helping you get to the real information in the value search.
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