Asset Management

A Definition of Transparency We Can All Agree On

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A contronym is a word that ‘evokes contradictory or reverse meanings depending on the context’. It sounds illogical, but there are more of them out there than you might realise. Think about how we use the word ‘sanction’. We can sanction the use of something, meaning we allow it. Or we can place sanctions on the use of something, which means we disallow it. Cleaving can mean to split something in two, or to stick two things together. Splicing also has the exact same two contradictory meanings of joining or separating.

Transparency is another example. Calling a person transparent can often be an insult – a suggestion that we can see straight through them to their poorly-masked, often dishonest, intentions. However, transparency in other areas is highly commendable – for example, in finance. Anything which encourages openness and wider availability of information is a positive thing for investors and the industry. (We’re proud to practise what we preach on this by publishing all Progeny Asset Management fees on our website.)

If we cast our minds back to this time last year, we were all getting ready for the introduction of the MiFID II legislation – a revamped version of the original Markets in Financial Instruments Directive from 2007 – which has been designed to increase transparency in the industry and offer better value and greater protection to investors. It was ushered in on the 3rd January 2018 and was something of an unknown quantity at the time. It intended to go further than any other pieces of market legislation have gone before.

It’s still relatively early days of course, but as we approach the end of the year, it’s worth asking whether MiFID II is on the way to achieving what it set out to do and understanding how it benefits investors.

Best Price and Performance

Despite it having been seven years in the pipeline, many parts of the finance and investment industries were underprepared for MiFID II on its introduction. This presented some teething problems in the early implementation of the new rules, for example where up-to-date information from fund managers was unavailable or difficult to find. Under the new legislation, more information about trading has to be made available so that customers and investors can be shown that they were offered the best price for their trades. The rules cover all areas of the financial services industry but, importantly, in terms of investment decisions, fund managers now need to provide separate information about research and trading costs – which were previously both bundled together under catch-all trading fees.

So, how does this benefit investors? Unbundling research and trading costs means that investors will be able to see how these costs break down, therefore getting a truer reading of a product’s performance. It helps us as investment managers to analyse our clients’ portfolios more effectively and get a clearer insight into how the component investments are working. For example, if a particular product stands out as expensive, with this new information to hand we can measure more accurately whether it is doing what it is supposed to do – for example, is it achieving the right level of return, and is it good value for money despite its cost? If it proves its worth, we would recommend that the client should keep it. If it doesn’t, we can remove it and look for something that more efficiently delivers on their ambitions. In this way, the transparency ushered in by MiFID II both improves our clients’ portfolio performance as well as keeping costs under control.

At Progeny, this transparency has helped us to provide a proven and visible added value for clients and makes sure that we are only using products with a cost where and when they are demonstrably justified. Over the year since MiFID II’s introduction, we have overseen an absolute reduction in our clients’ managed portfolio costs.

Competition Cuts Costs

As transparency of funds increases, so will the pressure on them across the market to reduce costs and become more competitive. This is a good thing for investors, because it will mean more choice and efficiency and will ensure that they won’t be paying for things they don’t need. Over time we can expect to see the greater development of products and services that respond more directly to what investors want.

Ethical or ESG investments (an area we wrote about a couple of months back) are an example of where previously people paid a premium for the screening process, but as an increasing number of funds now include an ESG screen as part of the standard process, it raises questions as to why people are paying that premium. In turn, that should hopefully increase competition to lower those costs and hopefully reduce the overall cost of the ethical offering.

Restoring Trust and Confidence

As well as the advantages for individual investors, the finance and investment industry as a whole will benefit from the new legislation. Even 10 years on the from the financial crisis, suspicion and a lack of trust are still issues that we need to contend with as an industry. Anything that helps restore investor confidence and encourages positive perceptions of the service we provide for clients should be welcomed.

At Progeny, we are always striving to provide a first-class customer service and add value for clients in every way possible. These goals are underpinned by our commitment to transparency which, by our definition, can only be a good thing.

If you would like help in structuring your investment portfolio, please get in touch.

This article does not constitute Investment advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your Investment Manager to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested, therefore your capital is always at risk.

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Author Rachel Blythe

Trainee Investment Manager, Progeny Asset Management

Rachel has experience assisting with private client asset management, dealing with a wide range of asset classes.

Learn more about Rachel Blythe

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