Times are changing and the once darlings of the financial industry have fallen on hard times as the fund management industry is going through a rough phase. The clients are becoming restless with the turn of events while the managers are figuring out ways to stay afloat with more than half the managers failing to retain their previously held top spot.
Here are a few things you didn’t know about this industry.
Blame it on luck
It is ironic that fund managers blame their underperformance to bad luck but never do the same when they overperform; that they attribute to their skill. It is common sense that no individual will wontedly underperform. What these managers fail to acknowledge is that human error is the cause of overperformance for some and underperformance for others.
Fund managers are slow to adapt
The current investor’s trend is a herd mentality wherein they are simultaneously in “risk on” and “risk off” mentality. As a result, when the market is wobbly all shares are sold simultaneously which makes diversification a total waste of time. Most fund managers fail to identify this trend and hence unable to reset their portfolio management techniques leading to their underperformance.
On an average 50% fund managers underperform
It is a common industry secret that 50% of active fund managers underperform even when the market is performing well. Hence, if you are an investor you must be wary of using fund managers. Even those managers who are in charge of commodities fail to deliver alpha.
What can you do as an investor
It is obvious that it is the fund manager and not the firm that plays a key role in fund management. Hence always stick with people who perform and not a firm which is at the top because you never know if the next manager will deliver an alpha or not.
Make sure that you fully agree with your manager’s strategy because ups and downs are part of the game but the long-term benefits are possible only when you adopt a proper investment approach. Do not overlook experience because these advisors have seen the market’s ups and down and will have a better understanding of how things work and what the pitfalls are than anyone else.
One advice any industry veteran will give you is to diversify your investments because this will safeguard them from the vagaries which have become common in the present marketplace.
“My grandmother was a great cook”, this is something many of us remember telling our friends, “She could have started a business selling her cakes”. This could be a common thought in many people’s minds that they wish their grandmother or father or someone in the family had started a business selling stuff or services that they were experts at.
Times were different then. Those days, people gladly worked with and for their family. Very few people actually thought of starting a business in any area. Then also they used their own savings and borrowed money from some known people. Borrowing from banks and institutional finance came into the picture much later.
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Once this concept became popular, many people could take their business ideas forward. Already established companies also look at options for expansions. And that is how the Initial Public Offerings or IPOs came about.
So who can offer an IPO?
An IPO can be offered by any kind of company, whether it is a small, new startup or a big established company. The reason behind the offering is the same. It is to collect money for the company. If we go back to the historical evidence, then Dutch merchants and English businessmen collected money and formed companies. The main aim was to collect a good corpus of money to start or expand a business.
The aim remains the same, but today after an IPO is offered then the stocks of the company are sold to individual investors or institutional investors. The company is listed on the stock market and then the stocks can be traded. The prices keep fluctuating based on the performance of the company.
Important aspects of IPO
There are many important factors that are considered before launching an IPO. It is a very complicated process and all the financial aspects and legal features need to be worked out in detail by their respective experts. They also engage with a big bank or financial institution, which is then known as the underwriter of the issue of stocks. There may be more than one underwriters at times when the issue is very big. They also engage the services of one book runner or lead manager. This is in order to finalize the price of shares. The share should not be overpriced or it may remain undersubscribed.
If you are interested in issuing an IPO, then take the help of experts for guidance. On the other hand, if you want to know whether to buy the shares of an IPO then read the prospectus and make an informed choice.
It is one of the most used universal marketing strategies by almost all kinds of businesses to promote expensive products and services compared to the economic ones. This multiplies their income in terms of sales as well as a commission for the services. For example, if you approach a stockbroker for advises regarding investing in shares or mutual funds, it is apparent that he will persuade you to go for an expensive one. You put in more money in the hope that you will get more, but that is just one of the probabilities. The sure outcome is that the broker will get a higher commission.
To keep a check on this malpractice made by a majority of the retail brokers, the federal laws have introduced this relatively new form of mutual fund shares known as Clean Shares Mutual Funds.
Why are they clean?
Clean shares have a uniform platform for pricing across all markets and therefore put a constraint on the unprofessional behavior of advisors to encourage their customers to invest in expensive shares. With expensive shares, the advisors get a higher commission and their interest prevails more than that of the customer. The advisors have to vouch in for recommending their investors to select affordable shares when you decide to buy clean shares.
Clean shares also bring in a high degree of transparency in the mutual fund market. Unlike other forms of shares, they do not levy additional charges like marketing fees, distribution fees like 12b-1, front-load or back-load fees. For example, if you invest in the hugely popular Class A shares, you will be charged 0.5% or more as the front-load fees by the advisors. In addition to this are other fees like marketing fees, handling charges etc. These wolf down a major chunk out of your returns and sometimes, your losses get escalated in the process.
On the other hand, when you invest in a clean share, you are not paying any of these charges, and the amount extracted from you is purely the commission of your advisor. You know what you were charged and the advisor is also aware of that. The money flowing is clear like water to you.
Another positive change brought by clean shares is that when your interest is to invest in an affordable share and get good returns and the aim of the advisor is to give you good profits on economical clean shares, there is no conflict of interest. The interests of both the parties are aligned concurrently towards the same clear objective.