Transcript: Are Your Investments Too Risky For You?

Published in Investing on 26 March 2012

David Kuo chats to Graham Mannion, founder of Investor Bee.

You can listen to or download this podcast here.

David:

This is Money Talk, the weekly investing podcast from The Motley Fool. I am David Kuo, and have you ever wondered what is in your colleagues' portfolio? What does it look like? What kind of diversification strategy do they follow, and what kind of returns are they getting? I call it financial voyeurism, and my guest today calls it an investing revolution. My guest today is Graham Mannion, founder of Investor Bee, so welcome to Money Talk, Graham.

Graham:

Thank you, David – thank you very much for having us along.

David:

Financial voyeurism – is that what it's all about?

Graham:

You could think of the business in one sense from that perspective, but any aspect of voyeurism is very carefully supported. The data is anonymous.

David:

Okay, so tell me a little bit about yourself. What did you do previously; what do you do now?

Graham:

So I've spent my whole career in financial services. I started out with HSBC and Asia Pacific, and increasingly focused more and more into investment management and money management. So after HSBC, I then went to McKinsey, worked in financial services, with a focus on asset management, and then from there UBS, which is where I worked before starting Investor Bee. I've always had a very strong interest in managing money.

David:

Other people's money?

Graham:

And my own, yeah, both, and I suppose in some respects I was very lucky to work at UBS Wealth Management, because I got to see the challenges other people face when deciding who to trust, and how to think about putting their money to work for them.

David:

So do you think that it is right for people to give their money to say HSBC and UBS and those kind of organisations to look after their money?

Graham:

I think it is potentially a very sensible decision for a consumer to trust somebody to manage their money. The critical thing is understanding who to trust, and I think we're entering a phase now where, with the availability of data and increasing transparency, it's going to be very important for institutions that want to manage people's money to demonstrate that they do that well, and give the customer confidence without trying to blind them with science.

David:

And are they getting there, do you think?

Graham:

I think there are some very encouraging signs from certain institutions, yes, in terms of how propositions are being developed, but the market is filled with all sorts of different offers to consumers and some are much better than others. There's still a very big structural problem, which is that consumers just really struggle to understand value for money. They're completely disempowered in most cases when it comes to investing. It's unlike most other markets in which they buy products and services.

David:

And whose fault is that, Graham?

Graham:

I think there's a variety of issues driving that. I would say, fundamentally investing and managing money is a complex activity, and so, with the best will in the world, it is difficult to make it simple for consumers, but I think we're contributing to that. But I also do think that there are areas of the market where perhaps certain providers are in danger of relying on the fact that it is difficult to understand, and it's not transparent, and that's actually a fact that they wish to capitalise on. I don't say that at all about the whole market. I think there are some very principled providers out there, doing great things, but consumers have to be aware that it's a big wide world out there, and not everybody is fully aligned with delivering the best value for money they can to the customer.

David:

So when you were managing other people's money, Graham, how transparent were you with them and their money?

Graham:

Completely.

David:

In what sense?

Graham:

I always took the view that, if my clients felt they knew how to run money and they understood investing from A to Z, that I probably wasn't the right person. I was always clear on my own limitations of what I was and wasn't capable of. But for families that wanted to be educated about the principles of diversification, about the principles of active versus passive management, about the principles of liquidity, about keeping portfolios no more complex than they need to be, then I could do a very good job for those people. I was also very clear about what they were paying for what they were getting, and probably, compared to a lot of private bankers, I might have charged a little bit less, but those principles meant that I was lucky enough to build a very big book of assets very quickly, and ultimately managed more than £300 million at the point I left UBS, having built that book in three years.

David:

Now, one area of opaqueness really is in the performance of fund managers. It is very difficult for the lay person, the average consumer, to try and decipher whether this fund manager is better than that fund manager, and they go on these track records, and they say, that would give me some idea. Do you think the financial industry is transparent enough, as far as detailing whether or not a fund manager is good or less good than the market?

Graham:

Well in one sense, the fund management industry's completely transparent. There's a massive amount of data out there. You and I could name any number of websites that will give you fund performance.

David:

Trustnet being one of them?

Graham:

Yeah, Trustnet, we're actually a customer of Trustnet for our business, and they do a great job at what they do, but there are any number of businesses that will provide fund information, and give you fund returns and tell you all the goodies that the fund's invested in, and its volatility and so on – the challenge is, putting that information into context. One of the problems with selecting funds is, you're not always selecting a manager, you're just selecting a benchmark.

David:

Do you think so?

Graham:

I think in the case of certain funds, yes. The principle decision a consumer's taking, when they invest in some funds, is around the benchmark that they are focusing on, and so it's very important to be aware of the consequences of how your money's managed; for example, if you select a fund that has a static allocation to such and such a percent in equities, and such and such a percent in bonds, as opposed to fund that says, we will do our best to invest anywhere around the world, and deliver a return in excess of inflation over five years. They're fundamentally different objectives, and the biggest decision you're making, when you face those two options, is whether you want to empower somebody to manage your money, or whether you want somebody to shadow a benchmark.

David:

Would you not say that some fund managers are just standout performers, in the sense – and I'm thinking here about Neil Woodford, I'm thinking about Anthony Bolton and Peter Lynch, previously who managed the Magellan fund. These were standout money managers, weren't they?

Graham:

No question.

David:

And that is why people flock to them, and in the case of Neil Woodford today, people are pouring money into his fund right now?

Graham:

Yeah, and I think that question is a distinct point from the one we were just discussing. If you ask, are there great fund managers out there, no question, there are fantastic fund managers out there, and indeed the work we do with real data, and completely objective analysis backs that up, the challenge consumers have is the need to pick a good manager, because there's an awful lot of funds to choose from. So one has to be very careful to distinguish between a manager that has a great track record in a particular category, and a bank or an advisor or an institution that delivers a good overall solution to managing your money, for a given level of risk. They're two different things.

David:

So do you think that the consumers today, the investors today, are suffering from information overload, or a lack of information, or a lack of usable information?

Graham:

I think it's both.

David:

How can you have both?

Graham:

Well, there's an overload of information that is only partially useful to the typical consumer. Most consumers don't want to know about tracking error and basis points, and frankly the percentages.

David:

Do they care?

Graham:

They probably would choose not to have to deal with this information, if it wasn't thrust into their face, whenever they're buying a financial product. So I think we have a situation where the market caters very well to those who are curious and engaged, and there's endless resource, much of it free on the web. But for the vast majority of consumers that want to know that they're getting good value for money in the most general sense, but how they're investments are managed, it's a terribly difficult world to penetrate and feel in control within it.

David:

Okay, so we've talked about the industry in general. Can we have a closer look at your business, Investor Bee? How does it work? How do you hope to help investors?

Graham:

Well, in a nutshell we believe there's a huge opportunity to take the principles of calculating indices to the next level.

David:

You are going to have to explain this to me.

Graham:

Yeah, so what that means is today there's a lot of information about given investment categories, UK equities, North American equities, Far East Asian equities, corporate bonds, government bonds, gold, infrastructure – whatever it might be, you can pick a topic and dive into it. However, if you're knocking on the door of starting to invest, and you say, well I could invest in anything around the world, how do I think about where to start? – that's a portfolio construction decision. It's an asset allocation decision. When it comes to asset allocation, traditionally there has been no objective data about how savings are allocated around different investment opportunities around the world. It is traditionally a subjective issue that relates to some effort to understand your desired level of risk, and then from there to understand how to translate that desired level of risk into an allocation around all these different things we can choose from around the world. Those decisions have had no transparency, there's been no data to actually demonstrate to people how those allocation decisions actually play out across different types of customers. So what we've done is spent a lot of time and put a lot of love and care into building a database of real portfolios, about showing how individuals actually allocate their money, or how advisors do that on their behalf. What that means is, we can provide simplicity about how money is managed at different levels of risk, and what is a fair return that a consumer can expect at those different levels of risk, and it's not a matter of opinion; it's a matter of fact, based on observing more than 1.2 million real portfolios today.

David:

But how does comparing myself with my peer group, or with the benchmark that you have, help me as an investor?

Graham:

Well, critically we need to distinguish between two different ways to look into our data. So if a consumer is interested to compare themselves with their peer group, once you understand, for example, how much somebody like them typically saves, or what their savings priorities are, then they'll have a great time having a look at our site, and looking at the relevant Investor Bee family that they belong to. If they answer seven questions, we'll be able to tell them what sort of profile they have, and what the typical behaviours and attributes are of people with that profile. But that's distinct then from thinking about how you actually invest your money.

David:

Why?

Graham:

Because you might have a group that is consistent in terms of having kids, having a particular saving priority, having a particular level of saving, but actually when you dig into the data, you find that, depending on the decisions they themselves have made, or the advisors that they've relied on, how they invest their money can vary substantially, and that really is the point to some degree, because what we then do, from an investing perspective, is take all of this data, and process it very carefully and very responsibly, to say, actually when you boil it all down, the fundamental question a customer needs to ask is, how much risk do I want to take?

David:

Do they know, though?

Graham:

No. Part of our service is to help them understand the consequences of taking different levels of risk, and how they go about taking that level of risk. So we would process the data to then enable them to see objectively what it means factually, statistically, to be a medium-risk investor, or a high-risk investor. We will then enable them to dig into the data, and see what the allocation is for a medium-risk investor in terms of UK equities, global equities, bonds and cash, and we'll also show them what investors taking that level of risk achieve on average after fees. So we effectively publish a benchmark for the fair return a consumer should expect for a given level of risk. That then means, instead of trying to interpret how somebody feels, and what risk means to them, we publish information about risk as a matter of fact, and let the consumer decide which level of risk is most appealing to them, and that's really important because it relates to some very difficult challenges the UK market faces in terms of distribution at the moment, so the FSA has been very vocal about its concern around risk-profiling processes. It's also, I think, rightly highlighted, and others have highlighted, the issue of, once you've categoried an investor's risk preference, which is a tricky thing to do, how you construct a portfolio to match that level of risk – again, it's a matter of opinion. We are changing those things, or we're contributing to those challenges, by giving facts. I think the final example of the challenge that's presented in this area has been in the press quite a lot recently, which is around investment product labelling, where it's clear that this is a very tricky and a very subjective issue, and ultimately it's very hard to stick a label on a fund that says this is medium risk, because medium risk means different things to different people. We're trying to take, and we are taking out, that subjectivity, that difficulty, because we've put the UK's biggest data set online for free, and answered that question as a matter of fact.

David:

So how much does age play in determining a person's risk tolerance? Do you tend to find, for instance, that older people approaching their retirement are less risk-taking than those people who are younger?

Graham:

Typically you would find that, yes, and it may not just be retirement, but if you have a particular savings objective, and you're getting closer and closer to the point at which you want the money for that objective, then you would typically find that the level of risk in the portfolio is declining.

David:

So are you saying that risk is a moveable feast, then? For a particular person? I mean, I would actually have maybe, flit between medium and high risk, depending upon not my age, but just the case of, when I want my money?

Graham:

Well, I think you would need to think very carefully about that, yes. So if you're a young person, and you're saving for a car, but you want to buy the car in a year, I wouldn't be advising (not that we give advice), but in the broadest sense, I wouldn't be advising that you stick it in emerging market equities for less than 12 months. The time horizon needs to be attached to what you want the money for.

David:

Unless, of course, you only have £1,000, and you want that Ferrari tomorrow?

Graham:

Yeah, and if you can live with losing it all, then maybe that's a fantastic strategy, yeah.

David:

If you win, you get the Ferrari; if you lose, you get the Polo!

Graham:

Yeah. Polos are a fine vehicle, from what I hear.

David:

I'm sure they are a very, very good vehicle! Now, in terms of the breakdown of the people on your website, how many are cautious, percentage-wise? Can we tell how many are cautious, how many medium- and how many are high-risk?

Graham:

We could tell you that data. I don't think we've published it on the web, but there is obviously a distribution of portfolios across different risk levels.

David:

Because doesn't everybody just say, I'm medium-risk, because that is actually the safest area to be in? Nobody wants to be low-risk, because otherwise they'd be seen as a wimp, and nobody wants to be high-risk, because otherwise they'd be sort of labelled as something like a testosterone-charged trader, so they go, okay, I'm just going to be medium-risk – that's the safest option.

Graham:

That's a really interesting point. In terms of our database, the distribution of people across different, the mix of people across different risk levels is fairly dispersed, so we certainly don't see everybody clustered in the middle band – that's absolutely the case.

David:

Not everybody is magnolia then, in other words? (My favourite colour, by the way.)

Graham:

And I think that it's also tremendously important that we don't just publish the data as a single point, and say, on average people do this. We are very careful not to do that. We show the data through the lens of risk. It's very important consumers think, or advisors think, on their behalf about what level of risk is appropriate for the customer. So we enable people to view our data through the lens of risk; you won't find anywhere a sort of central number of how everybody does in aggregate. But I want to come back to something you said a few minutes ago, which is how people feel, because that's a tremendously important and difficult thing to grapple with, first of all because one needs to understand the difference between somebody's emotions towards risk, and their true capacity to take risk. We think that, in that respect, it's very important to show individuals the consequences of taking different levels of risk, not asking somebody how they would feel if – because that's very difficult to frame the questions properly and to interpret them consistently. We think it's much more transparent and much more efficient to say, if you take these different levels of risk, this is what actually happens to you, or people that have taken that level of risk. It's reframing that issue, and while emotion will always play a part in trying to understand what a customer needs to do, by presenting the facts, the emotion is in the background, and it's something for the customer themselves to wrestle with as they think about the consequences of taking different levels of risk, as opposed to leading with, how would you feel, and then trying to interpret that, which is a tricky, tricky way to try and manage somebody's portfolio and meet their expectations.

David:

Okay, so in terms of people's portfolios, the data that you have collected, how many of those people are leaning towards something like a low-cost index tracker, as opposed to a managed fund? Is that data available?

Graham:

It is in our data set. We haven't published that level of detail from the data set, but we see a wide variety of different investment vehicles. I think there are more than 35,000 different funds that fall within our data set. Some will be low cost trackers, some will be much more expensive managed funds, but while expensive, they may in certain cases do a very good job. So in order to help provide some insight around selecting different funds for a consumer, what we do is present the benchmarks for how portfolios are built at different levels of risk, by showing the allocation to UK equities, global equities, bonds and cash, and we also show the average return that customers achieve at that level of risk after fees. So then, when you want to think about whether to buy a tracker or an active solution, you can think about not cost in isolation, but value for money. So one of the other things that's very important, and we want to work hard to help fund managers and banks and insurance companies articulate, is value for money. So if you look at Investor Bee, and our 'compare investments' tool, what you will see is a comparison of all the multi-asset funds on sale in the UK today that have been running for at least three years, and how they have done, based on the level of risk they've taken, relative to the portfolios that we monitor in our database. What that means is, we can then tell the consumer whether a fund has delivered a more or less than fair return after fees for the level of risk it's taking, and interestingly you find, within that analysis, some funds that have done a very good job are actually quite expensive. The challenge is making sure you pick a fund, if it is expensive, that's going to deliver value.

David:

But you're not going to be telling people which of the funds they should be putting their money into, in order to get that market-beating return?

Graham:

We are showing them which funds have beaten the market. That's very clear on our site, and it's clear in a big green pound number, and those funds are ranked from best to worst. But what customers also have to realise is that, as with an active equity fund against the FTSE 100 or the FTSE All-Share, some months and quarters it will be ahead of benchmark, and some months and quarters it may well be below benchmark. So what a consumer has to decide is whether they want to take the risk of picking an active fund, or whether they'd rather be at the benchmark, and if they decide the latter, then we will tell them for free what the asset allocations are underneath the benchmark, and we'll also tell them what it would cost them to invest in that strategy across, I think it's eight of, the leading execution-only platforms in the country today.

David:

And what is your personal preference? Do you personally prefer index trackers, or managed funds?

Graham:

I have both in my managed portfolio.

David:

Okay, that's a good answer.

Graham:

Yeah, it's genuinely the case.

David:

It's a good magnolia answer, yes.

Graham:

It also depends on what you're trying to manage your money for, and how actively you want to manage it yourself, and rebalance it yourself. So one of the reasons why I hold some multi-asset funds in my personal portfolio is, I think it is sensible that, rather than relying on me to read the paper and read it on the right day, and make a decision as soon as I go into work, I'm figuring that some of the best multi-asset managers in the country probably get out of bed in the morning, and they're looking at that relentlessly, and their team's looking at that relentlessly, and if they want to make a decision, it's made before 10am; whereas I might tear out a piece of the FT, leave it on the chest of drawers, get to looking at it on Sunday, go online and change my portfolio the following Wednesday. It's not just about whether you're smart at managing money – it's the whole process by which you set up how your money is managed. So back to the start of the answer – one of the things with multi-asset solutions is empowering the manager to get on with things, and as long as you do select good managers, then they have the potential to add value.

David:

I suppose there is another issue also, and that is that some markets are almost inaccessible to the private investor. I mean, we were talking to somebody who managed money for the African market, and many of those African markets are totally closed to the private investor, so the only way you can get in is through a money manager anyway.

Graham:

Yeah, I mean there are various sort of structural issues like that. Another is just trading costs and so on. Even if you could access the particular market you're interested with a fantastic low-cost tracker fund, if you wanted to track, what is the platform fee for buying an extra position? What's the hassle of running, having to monitor one extra product in your portfolio? I think consumers value simplicity, so if, in buying a multi-asset product from an institution whose brand they trust, they get access to markets globally on a relatively cost efficient basis, you're taking advantage of economies of scale there that you just can't access as an individual investor playing around with individual positions in your portfolio.

David:

Well I mean, this has been a fascinating podcast. I have one final question, Graham, and it's going to be quite a tough question – I hope you can answer it (not that any of the other questions weren't tough, but I mean this one is really tough), and that is: what do you think is the biggest mistake that private investors make?

Graham:

I don't think that is too tough. I think Warren Buffett (I'll defer to an expert on that one), I think Warren Buffett said ...

David:

He's always the safety fellow.

Graham:

... turn the radio off. I worry about people's response to random advertising, anecdotal observations of what's going on in the market today versus tomorrow, versus the next day, versus what's in the paper on Sunday versus Monday. If you try and process the news and the information with that frequency, and make decisions on that frequency as a private investor that's got a job to do, it's likely to be unhelpful. I think if you focus on the long-term principles of, do you want to take more or less risk, making sure you're fairly rewarded for that risk, making sure your portfolio is sensibly allocated, and then switching the radio off, and reading something perhaps a bit more pleasurable on the weekend than whether the gold-mining stocks are up or down, I think that's beneficial.

David:

So are you saying, in fact, that people should be ignoring what is going on in Europe and the euro debt crisis?

Graham:

No, I think there are certain things that are very important to think about, but they're longer-term trends rather than what happened yesterday. So the example that was discussed earlier this morning was inflation – well worthwhile thinking about the consequences of having had interest rates low for so long, and what that means ultimately for protecting your assets, sitting in cash long term is probably not a sensible thing to do, if inflation's likely to go up, and there are reasons to think it might, in due course. So being aware on that level, I think, is sensible, but diving into detail about whether ...

David:

That Greece will be ejected from the euro!

Graham:

... or whether one airline stock is better than another, or whether I should put my entire ISA allowance into a fund in China – that's focusing on a level of detail that is not helpful for most consumers who are not expert investors.

David:

Okay, well that's a very, very good answer. Well, thank you so much for coming in today, Graham.

Graham:

Thank you.

David:

I have one more chore to perform, and that is the most difficult chore of the podcast, which is trying to find a quotation which I think will sum up what we've been talking about, and the quote comes from Ken Blanchard, who said: "None of us is as smart as all of us" – does that make sense to you?

Graham:

Absolutely.

David:

That's what Investor Bee's all about, isn't it?

Graham:

It's all about giving people real data.

David:

Okay. So this has been Money Talk, I have been David Kuo, and my guest has been Graham Mannion of Investor Bee. If you have a comment about today's show, please post it on the Money Talk web page, which you can find at fool.co.uk/podcast, and until next week, happy investing!

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