Why are benchmarks important in mutual fund point of sale documents?

In response to a recent blog on benchmarks and behavioural economics I have been asked to comment on the importance of benchmarks in point of sale documents.  The following is the detail supporting that response, and (at the end of the post) a set of answers to a number of questions:

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What is investment risk?

“What is investment risk” is both simple and complex and in order to assess the information needed to assess risk we first of all need to qualify the world view of risk and return and then the model we are using to manage the risks and their impact. All this is beyond the subject matter expertise of the individual investor and why point of sale documentation can only ever inform about the broad nature of risk and return but never be sufficient to allow the investor to fully own the decision. Ownership of the transaction decision resides with ownership of the process and the significance of risk assumed with respect to risk via structure, assumptions and costs.

At a very basic level, risk is what happens to a price between two points in time and the impact of that movement in price – it can be both positive and negative.  But what gives rise to risk is more important than a mere list of risk factors, or indeed a narrow quantitative measure of risk.

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Another story of leveraging gone wrong…..

Significant and inappropriate leverage violates one of the key objectives of portfolio construction planning and management for individuals with financial demands on a portfolio – this objective is to minimise the risks to the ability of assets to meet these needs over time. Adding substantial leverage to a portfolio that is needed to meet financial needs increases the uncertainty of income and capital security.

From the Financial Post, a “Victim of bad advice struggles to pay off investment disaster” should be a lesson to all those with advisors/advisers who recommend leverage as a significant part of their investment strategy.

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When two universes collide – the “Active Versus Passive” debate

Allocating to hedge funds for the ordinary individual and for most financial advisers/advisors is as easy as passing through the eye of the needle

In the passive active debate there is a duality, two universes living side by side.  And by this I mean we have those who say that active management is a zero sum game and worse when fees and transaction costs are taken into consideration.  On the other hand we have those who say that active management is not a zero sum game and that value can be added even after fees and transaction costs are taken into account.   Interestingly academics have taken both sides of the debate.

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The reality vortex! How to turn a mutual fund into a loaf of bread…

From a recent Morningstar article about some Invesco research into fees and costs:

“A test audience was asked which it would least enjoying paying: fees, commissions, charges, or costs. Respondents were 9 times more likely to say fees rather than costs.”

I am not really sure what Invesco is trying to pull here.  Really!  But I am drawn to the absurd and this is absurd.

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