The Investment Industry, Trust, And The Ulysses Trick

Fri 14 Jan 2022

By Brian Dennehy

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Who can you trust in the investment industry in its widest sense, including media and regulators, advisers and fund platforms, and rating companies?

The Ulysses TrickAs you saw last week, we believe the most sensible approach is to not believe everything you hear, but keep an open mind i.e. be constructively sceptical in dealing with the investment industry and those who hold themselves out as offering some special insight.

Today I explain why that is the correct approach, with some practical pointers for you. 

The Strange Truth

The investment industry is a strange beast. 

The priority of the industry should be to perform.  That performance might take the shape of capital growth or income, and take into account your willingness to take on risk.

However, if you break it down, in the end it is all about performance, and for most people that simply means growth in the value of their money.

Yet the investment industry hasn’t got the memo, because almost no fund group or adviser talks about performance and growth, except fleetingly or vaguely, and never with any meaningful evidence – check for yourself.  They tie themselves in knots not talking about performance!

Example 1.  Fund Shortlists

The most publicised fund shortlist is from HL, and you can find details from this page where you are told the criteria are the manager, the culture, the process, and performance – ah yes, performance, though it is not clear how they use this.  The prior three factors give you no consistent steer as to the probability of outperformance of the fund going forward – if HL do in fact have detailed research and decades of evidence to prove me wrong, I will doff my cap to them.

All such shortlists are the same.  No substantial evidence that they work for you, the investor.  We covered this before.

Example 2.  Fund Ratings

Since December 2020 I have kept an eye on the ratings for JOHCM UK Equity Income, for which the likes of Morningstar and Trustnet gave trash ratings to that point, but where we identified a turning point in real time.  In the months ahead it went on to be not just a great performer, but the best in the total universe of funds in some periods, which I highlighted in teleconferences through 2021.

The response from these fund rating companies to this performance?  Zilch.  Morningstar still have it as two star, and Trustnet one star.  These ratings have nothing to do with what is going on in the real world.

If you can find out how Morningstar come up with these ratings do let me know – I can’t find anything intelligible, and certainly no evidence that they are of any value at all to investors.

This “strange truth” could go on much longer and turn into a bit of a rant.  But I will just leave you with one more.  A big global brand fund manager emailed me proclaiming the 10th anniversary of a fund and gave 6 reasons why this has been such a special fund for investors and advisers – not one of those reasons was performance!  Oh dear.

The Siren Call Of The Investment Industry

The investment industry, including the media, knows how to pull your strings.  They understand the psychology of potential clients, as do the best marketers in all industries – more on that in the next teleconference.

And they are very successful at doing this in spite of the facts, for example that 94% of funds are not good enough; that fund ratings are twaddle; that best buy lists are woolly; that no one talks about performance or growth in a meaningful way, even though that is the whole point of this industry (at least from an investor perspective).

Hang on.  Is performance the whole point of the investment industry? 

No, definitely not.

Speaking to the marketing director of one major fund group in the early Noughties he showed me some very revealing analysis.  He asked me “Who do you think are the most profitable fund groups?  Those with the best performing funds, or those with the biggest marketing budgets?”

The answer was those with the biggest marketing budgets, and he showed me the evidence.  Money from investors was flowing in huge scale to those with big glossy marketing campaigns, not those with the best performance.

Potential investors wanted simple solutions, were impatient and bought what was in front of them, despite how important this decision was to their future well-being.  They might well spend more time researching a £500 TV purchase than a £50,000 or £500,000 investment or £5m investment.

This doesn’t mean fund groups are bad.  They are businesses like any other that are focussed on their own profitability.

It isn’t the fund industry which needs to change.  The approach of investors needs to change.  It isn’t simply an educational issue – that is a relatively easy gap to fill, and at FundExpert we will do all we can to help in that regard.  The big issue remains how we think – a behavioural problem.

The Siren Solution

You can’t change your base instincts.  But you can change how you respond to them.

The clue to the solution is Ulysses.  Ulysses wanted to hear the Sirens' seductive song, but also knew that this would drive him insane and result in his death.  So, as he sailed towards the Sirens he put wax in his men's ears so that they could not hear, and had them tie him to the mast so that he could not jump into the sea towards the Sirens.

Don’t worry, you don’t need to tie yourself to anything!

You just need to accept that there will be some distractions, some of them seductive marketing and others exciting tips.  But, and this is the important bit, you have a plan which acts as pre-commitment, which ties you substantially to an investing process in which you have confidence, and where there is substantial evidence that it works.

That doesn’t have to include Dynamic or Vintage Ratings, but those are a pretty good benchmark against which you can judge the seductive calls of glossy ads, hot tips, and salesmen with shiny shoes.


This is not exhaustive, but it is a good start:

  • Accept that “94%” of funds being mediocre at best is a fact.  We update this analysis every year, and it confirms a volume of independent research stretching back decades.
  • Accept that investment experts get “stuff” badly wrong, suffer from over-confidence, and typically have no special insights.
  • Accept that you (and I) also have no special insights into highly complex investment markets.
  • Ask for the evidence.  This applies particularly on ratings and best fund lists.  You don’t need to be confrontational, just ask for the long-term evidence that their approach has a probability of achieving better than average growth in the future.

A ratings system or best funds list should have these four components:

  • Straightforward to identify top-rated funds.
  • The underlying process must be objective, clear, and understandable.
  • It must be easily repeatable.
  • There must be a volume of long-term evidence of it generating extra growth.

If it is not clear that this is the case, send them through these bullets and ask if their process meets these criteria.

  • Accept that we all (including you and I) have brains which are poorly designed to achieve investing success.
  • Act to write a plan.  It doesn’t need to be long, and will have the following simple elements:
    • How to select funds
    • When to review fund purchases
    • Reasons to switch from existing funds
    • When to switch into cash
    • When to switch back from cash into funds
    • Maximum number of funds
    • Minimum % in each fund


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