ASIC says "swim between the flags"

Swimming Between the Flags - Australian Securities and Investments Commission

I think this is a great campaign and really powerful analogy!

The campaign, aimed at retail investors, will classify investment products as being inside the flags (safe) or outside the flags (potentially unsafe).

Investments classified as outside the flags include:

• Margin lending (although we know that's a loan not an investment per se)
• Debentures
• Mortgage trusts
• Derivatives
• Structured investment products

Investments inside the flags include:

• Bank deposits
• Superannuation
• Standard managed funds
• Blue-chip shares
• Products where independent financial advice has been received

Of course those poor mug punters who took apparently independent financial advice from dodgy planners will perhaps quibble about the last inclusion between the flags.

Improving financial literacy and facilitating investor education should be a key focus for ASIC in my view. I recently went to a presentation by a planner group to a number of concerned investors with some trees, grapes and other structured products. The sheer level of ignorance amongst that audience about exactly what they'd invested in was staggering. (In fact it was only exceeded by their anger and indignation at curiously the banks that had funded them rather than the planners whose job it was to explain the risks...go figure )

ASIC has put "standard managed funds" as between the flag investments. What is there definition of "standard"?

This is extraordinary, as managed funds are by in large massive destroyers of wealth because of their stupid investment mandates which handcuff normal excellent investment analysts into making stupid and ill advised investment positions.

Managed funds should definitely be an "outside" the flags style investment, they are disastrous for investors.

It's a fair question you raise BB. One person's "standard" is another's "exotic".

But don't throw the baby out with the bathwater...

Hi Nigel,

On ASICs website it actually says "direct gearing" not "margin lending". I am very interested how ASIC believe that borrowing to invest is "swimming outside the flags" as so many Australian's buy an investment property through borrowing (ie, gearing).

Maybe if ASIC were stricter on policing their policies rather than spending their time making marketing material taxpayers would be better off? Everyone who receives financial advice should be given a Statement of Advice disclosing all fees and commissions. It will probably be a long time until this happens for real estate...

Cheers,

Dan

Nigel,

Unfortunately, managed fund bath water is so toxic it kills the baby in the bath tub.

Another unfortunate truth is that too many people keep using this water hoping to grow stuff (wealth).

What's the saying ... " good money after bad ...."

BB with respect that's just not correct. The are a whole range of underlying assets in which managed funds invest.

Bear in mind that a managed fund is just a form of investment structure which pools lots of investors' money together and invests it in a way that they have no day to day control and they then share in the benefits produced.

I guess what ASIC thinks is a standard managed investments scheme is probably a fund which is long only into large, liquid Australian shares with a broad spread (ie not a concentrated or "high conviction" fund).

So if we follow your assertion, investing in shares in large blue chip companies is toxic. That's just not the case in general.

Australian shares have delivered around 11%pa over the long term. That's not toxic - that's pretty good.

Do you also believe that index funds are destroyers of wealth?

By your argument, an index fund which mandates that a fund hold the entire range of ASX200 shares in exactly the same proportion as the index - is just as bad ?

I'm not sure that such broad statements are particularly useful or accurate - as Nigel said, not all funds have such strict mandates ... and you don't have to invest in those which do ... they are there for people who wish to gain exposure to a certain, clearly defined sector or segment of the market.

Having worked in the funds management and financial planning industry for the last ten years, my mistrust and disgust for managed funds in general has been built up first hand and direct from the horses mouth, I have and do work closely with alot of boutique and large fund managers.

A huge proportion of fund managers (long only here, hedge funds are a different beast) run investment mandates which are so restrictive that they do not allow for common sense or real judgement of economic conditions which would necessitate shifts in asset allocation.

You would think that a professional investment manager would have as their very first investment mandate to INVEST PRUDENTLY in all situations. This however just isn't the case, in fact investing prudently is often not even a consideration. Most long only managers are just closet index huggers so they must hold a stock just because it has a certain level of weighting within a particular index, not because they believe it to be a strong candidate for investment.

As far as investing into AUS large blue chip shares, did I even mention this in my post? Don't put words into my mouth.

As a general rule, direct investment into AUS blue chip shares is a far superior way to invest, purchasing quality assets and a quality price generally leads to quality results.

Many make the arguement that fund managers allow you to diversify into a barrell full of stocks at a low investment level. This is true, but diversification alone doesn't achieve much, it's fund manager's double speak, other forms of double speak are TRACKING ERROR, BETA ENHANCEMENT.
I get to ask the invesment manager of many funds how they invest or what they invest into, most say a only a handful of quality stocks or they just stick with one asset class, at most 2. So the managers themselves don't believe in diversification, they have to toe the company line publicily though.

SIM,

Presumptions are a dangerous thing.

I would rather see people invest into Index funds because at least you are not being duped into believing the investment manager (long only, hedge funds or absolute return funds are different beasts) will be doing something else other than being a undercover index hugger.

Index funds are much lower cost whilst achieving much the same if not superior returns over "active" fund managers.

My arguement will always be, why pay an investment manager if they do not or will not INVEST PRUDENTLY on your behalf? Isn't that a large reason why people use investment managers in the first place?