The fundamental tenets of creating investment products are simple: Start with quality assets which align to stated investment objectives. House these assets within an appropriate structure. Manage the assets in an open, transparent way with experienced professionals acting as careful stewards of investor capital.
Of course, not all funds will perform perfectly. Markets will ebb and flow. But this simple approach provides multiple benefits. Firstly, it provides asset managers with the best chance of success across their chosen strategy. Secondly and most importantly, it allows investors to truly understand their investment, navigating the risks and opportunities an investment may provide.
Only when the tide goes out
Consider Warren Buffett’s famous line, “Only when the tide goes out do you discover who’s been swimming naked”, against recent high-profile fund failures. Here in Australia, First Guardian & Shield Master Fund have added to a litany of failed funds over many years. Each are leaving behind a trail of devastation for their investors. Hard working Australians have invested large portions of their life savings into strategies in good faith, only to see their wealth evaporate.
The hard-earned capital of every single investor should be the central concern of any persons who have put themselves in the privileged position to manage it. Yet time and time again, the post-mortem of a failed fund sees a similar set of patterns emerge: Low quality assets which do not align with a fund’s stated investment objectives. Complex investment structures which are too difficult to reasonably unpick let alone truly understand. Strategies which don’t weigh up the liquidity characteristics of their underlying assets. Managers lacking cross-cyclical experience. Managers who didn’t put the customer at the heart of everything they do.
Although fund failures rarely happen in slow motion, there are warning signs. Common signs include managers relying on high-pressure sales tactics, or lesser-known groups pointing to rapid asset growth. Consider the old cliche that if it sounds too good to be true, it usually is. But it’s not good enough to rely on cliches when judging the security of your investment.
It’s of an incalculable devastation to these people and their families. Investing towards a dignified retirement is the sum of most people’s life’s work. But sadly, these are not isolated missteps. And without uniform, detailed and available disclosures, yet again it was only after the tide went out anyone realised there was anything wrong.
Swim between the flags
The common characteristic across these fund failures is lack of transparency. And that must change. It’s for that reason we so readily welcome the attention of regulators into private markets. A uniformity and standard across private capital for valuations, conflicts of interest, fee disclosures, data and transparency will raise the bar and make for greater confidence in the sector.
But we shouldn’t wait for regulators. All private market industry participants should focus on immediately stepping up to deliver the following:
- Data and Transparency – Open access to uniform, detailed portfolio information including the following as a minimum:
- Number of assets
- Type of assets
- Sizes of assets
- Sectors
- Geographic spreads
- Asset quality
- Asset return profile bands
- Asset vintage and seasoning details
- Performing & non-performing asset details
- Interconnections – Detailed explainers of complex structures:
- Corporate trees
- Outline of any related groups
- Explanation of director or shareholder participation in fund assets.
- Valuation policy – Confirming what a portfolio is worth, providing:
- Valuation policies and how they are applied to each asset type
- Dates of valuations on assets across the book
- Description of the valuation policy’s process rigor and independence
This is not a moment for defensiveness—it is a moment for leadership. We must raise the bar for transparency, governance, and investor protection. Let these failures be the clarion call that drives our industry forward.
How many investors in failed funds would have not invested if this kind of information had readily been available? How many failing funds would have been caught far earlier if these disclosures were regularly reported? Providing fulsome information as a matter of course is the right place to start.
Transparency as a competitive advantage
At La Trobe Financial, we operate to the highest level of transparency. We regularly and openly update the market, making detailed portfolio reporting freely available with hundreds of data points to analyse and review.
Our reporting, our disclosures and our insights provide, in our view, what an interested analyst would want to make an informed decision across any of our strategies. We provide data and insights for the world at large to review, get under the hood of what’s driving our portfolios, and to genuinely test our thinking. And we’ve proven, time and time again, that this approach builds trust and above all, is central to the investor experience.
We invite our private market peers to join us in striving to continually hold ourselves to a higher standard. Because our investors deserve nothing less.
Chris Andrews
CEO, La Trobe Financial
