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Weekend reading: Not very cautious

Weekend reading

Some good reads from around the web.

You can’t keep a bad idea down in the financial services industry – like Hindu vetala, the same ruses, obfuscations, and scams keep resurrecting in new forms to haunt us.

Well, that’s if the service providers in question have any sense of irony. Clearly that’s lacking at The Royal Bank of Scotland, who’ve decided to resurrect a controversial idea in the form of… the same controversial idea.

Barely a fortnight ago, Barclays was fined £7 million for investment advice failings, which basically amounted to calling funds ‘cautious’ and ‘balanced’, which the average consumer hears as ‘safe’ and ‘secure’.

So I was pretty surprised to get a press release from RBS that kicked off:

Today, the Royal Bank of Scotland will launch a major push into the retail fund management sector with the launch of two new funds (Cautious Managed and Balanced Managed) that have competitive charges, and aim to manage volatility to below market averages.

*Splutter!* What gives? Had RBS already spent so much on paperwork and logos for the new funds that it decided a fine of £7 million was a small risk to take?

Then we get to the money shot:

The Cautious and Balanced Managed sectors are among the most popular with IFAs and retail investors.

Ah, now I get it!

Moving on, RBS explains its strategy with the new products as follows:

The bank will be using a unique combination of strategies around diversification, trend analysis and volatility control to deliver its new propositions.

Here the news is a little better. Regular readers may recall me moaning about structured products in the past. I was happy (and not a bit surprised) to see that these funds simply offer regularly rebalanced exposure to the standard asset classes, with no derivatives linked to the value of the FTSE in 2015 or what have you.

But as the FT points out, the cautious fund could hold up to 51% of its money in equities, while the balanced fund could hold up to 81%. These may fit the current guidelines for those labels, but they don’t seem wise after the Barclay’s ruling.

Finally, the 1% annual charge isn’t the worst offender in the world, but all that rebalancing could result in a higher and somewhat hidden Total Expense Ratio.

You can slash costs by simply saving into cash and a cheap tracker. Or if you’re really risk averse, consider rolling your own DIY guaranteed bond.

Money and investing blogs

From the mainstream money sites

  • A retirement program for the risk averse (US) –New York Times
  • German business: A machine running smoothly – The Economist
  • The Boardwalk Empire way of doing business – The Motley Fool
  • $7 billion pulled from emerging markets on Egypt – FT
  • How inflation has previously boosted equities – FT
  • JP Morgan’s new 0.25% active fund: The future? – FT & Merryn
  • John Lee on why he invests in family-run companies – FT
  • Two new funds target cash-strapped first-time buyers – FT
  • Current best building society savings rates – Telegraph
  • China’s ‘bomb shelter’ hoteliers – Telegraph
  • Make £100s shopping via cashback sites – Telegraph
  • How to make a career leap – The Independent
  • Halifax: Houses prices fell 2.4% in 2010 – The Guardian
  • Spot the theme: Central bankers Bernanke, Trichet and King look through high inflation in commodities and emerging markets

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{ 5 comments… add one }
  • 1 OldPro February 5, 2011, 12:32 pm

    Erm… I think you meant to say the German business machine is running ‘smoothly’ old chap… Another coffee perhaps…?

  • 2 Thomas Jones February 5, 2011, 1:05 pm

    The majority of clients that are risk rated using a tool applying a risk scale of 1 – 10 will generally fall between 3 – 6. Therefore, Cautious Managed and Balanced Managed fall within this scope.

    The fact that one fund/investment doesn’t use derivatives doesn’t make this preferable to those that do. Used correctly they provide a useful tool in managing risk and gaining exposure to certain asset classes. I think this was one of the main permissions with UCITS III.

    According to the FT article they are using derivatives to gain exposure to certain asset classes:


    “The funds will also rely on a type of derivative to gain exposure to asset classes, an unfamiliar process to many retail investors.”

    IMA sector definitions state that they can hold up to 60% in equities, BUT must have at least 30% in fixed ineterest and cash for Cautious Managed funds. For Balanced Managed the main restrictions is a maximum of up to 85% in equities but no restriction for fixed ineterst and cash.


    It’s important to note that they are “Managed” funds and part of the charges are paying for management expertise, there’s no active fund management with things like tracker funds so it’s only fair that you’re not paying for this feature, hence the lower charges.

    You may be interested to know but the risk rating for something like a UK Tracker fund is commonly around 7 out of 10, that’s around medium to high risk.

    Thanks, Tom

    P.S. As a side issue, I wouldn’t say I was a fan of structured products in the main but to give some small credit they don’t provide high levels of commission, no more than 3% initial in most cases and no trail commission. There are loads of other products that can offer a heck of lot more commission than this and therefore, it’s difficult to see that commission is drving the sale of them.

  • 3 The Investor February 5, 2011, 1:32 pm

    @Tom – Thanks for that feedback. Yes, I saw the mention of derivatives in the FT piece but nothing explicit in the RBS release about the funds, so I gave them the benefit of the doubt

    If they are actually using options to hold equities etc, we’re back into the black box of structured products again. That’s my beef with structured products, btw – they’re opaque, and most people don’t understand what they’re buying or how they’re paying for it (including internal costs) nor issues like counter party risk. I accept there’s a role for derivatives in investing, but most people don’t need it.

    Re: The managed charge, yes agree someone has to pay for it (though this sounds like mechanical rebalancing to me). But academic studies have shown most private investors do *not* benefit from being in active funds versus passive. I can see a strong argument for active if you want to buy something specialised like small oil companies or gold miners, but not for vanilla equities, bonds, cash and REITS. Finally, as for 3% commission, that’s not high if you’re an IFA perhaps, but if you’re a private investor who has the option of paying 0% initial buy using trackers and sensibly allocating assets over the long term, it’s massive.

    All in all it’s not the worst non-passive product out there by a country mile, I agree. But the labels seem poorly chosen to me, and I question whether people should buy financial products from banks at all, given their terrible record (see Bank Funds Suck on The Motley Fool for an overview of past performance from this corner of the industry, which reports: “Taking total return during the past 10 years, 28% of bank and insurance-run funds were in the bottom quintile, 24% in the second-bottom quintile, and just 12% in the top quintile.”).

  • 4 The Investor February 5, 2011, 1:33 pm

    @OldPro – Oops! Fixed now. More coffee on the boil.

  • 5 Moneycone February 6, 2011, 4:19 am

    Looks like Bank Of America is their mentor! 🙂

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