As a young(ish) advisor during the credit crunch recession, I held a lot of meetings with shell shocked clients who couldn’t believe their money had fallen by so much. One such client, an architect, complained that if he designed a building that would fall down, he wouldn’t get paid for his work. Why should fund managers still charge fees for losing clients money?
The architect was being totally unreasonable in his argument but stuck to his guns. I argued that a building is based on an architect’s design and an engineer making sure the building has the correct structures to stay up.
Investing is not that simple. A fund manager have to contend with unsystematic risk that is specific to a company and systematic risk that is inherent to the entire market. In the building industry, the sky rocketing prices of timber and insulation does not impact on the architect’s ability to do his job. It does however, have an impact on the price of commodities and the stock price of companies involved in home building. Ronaldo moving 2 Coca cola bottles at a Euro 2020 press conference was credited with wiping $4 billion off the companies value. A snub like that may not make a building fall down but it will decrease the chances of an architect getting more work and reduce the value of their business!
Even the time of year can have an impact on the value of your investment, with the summer tending to be a quieter time of year.
Another argument made was “why didn’t they just move to cash?!!!” The simple answer is they can’t. A fund manager is constrained by the mandate of the fund that they manage. If their mandate says they invest in equities, that what they have to do. When there is a market crash, they are able to change the make up of the stocks held in their portfolio but they cannot move to another asset class unless their mandate says they can. While some people may want to move to safer assets, other investors will see it as a buying opportunity and pile in to buy cheaply priced stocks. Imagine if they invested in a Global Equity Fund only to find it was all in cash? Their first call would be to their lawyers.
Investing is not an exact science, there are a lot of factors that will affect a companies stock price, sometimes they will be fleeting changes (like the Ronaldo incident), others will last for years.
And what happened to the architect? He reckoned he could do better himself so he set up an self directed pension and invested it all in…AIB!!!
21 June 2021