It’s been a difficult past few days for most of us, with volatile markets and, more importantly, tragic and worrying events unfolding before our eyes in Ukraine. One of the things that has kept my fund research team busy has been assessing underlying exposure to the crisis, and so for today’s brief podcast, I wanted to talk about transparency in the world of funds. Transparency can be relevant for many elements of the investment world, but primarily today I’m talking about the simple act of knowing what you are invested in.
One would think that when buying or holding an investment, knowing what you own would be simple and straightforward, but in many ways it isn’t. Let’s take the world of open-ended funds. For the average retail client, and I suspect many financial advisers, having direct and immediate access to underlying holdings is a given. Look around any asset manager’s website, and you’ll find a real mix of data. The fact sheet is often the best source, but often that will limit itself to top 10 holdings, plus sector and country weightings.
Take the question of whether you have exposure to Russia, the fact sheet may get you your answer in some cases, but more often than not, what is held below the top 10, or in the basket of countries marked ‘other’, is entirely opaque. I’ve often found investment trusts are a somewhat better source of data for the retail investor, in that they often list all securities held in annual and semi-annual reports - albeit heavily time lagged. The best source of data are ETFs however. Whilst we are firm believers in active management, in this instance I’m afraid ETFs are a long way ahead in terms of transparency, with iShares, for example, providing full daily holdings data. Of course, ETFs can be active as well as passive, but though this is a growing area of the market and a topic for another day, really the ETF market is dominated by passive investments.
One reason might be the concern that other market participants could use that information against them. For example, for very large funds or strategies, it can take several days or weeks to fully buy into a new position. Algorithms might easily be setup to track new holdings on the assumptions that their ongoing buying will push the price up, and so buying in as they start their order would be beneficial.
On the flip side, the classic example of where transparency hurts when you are exiting comes from Neil Woodford. It was well known that his list of holdings was circulating round short sellers at the time he was seeing outflows. The knowledge that he was a forced seller of less liquid names was potentially valuable to some looking to profit from shorting those stocks. Woodford did try to lead the way in improving transparency and providing these to the market, but I’d argue the issues there were more related to Woodford than the principle of transparency.
Interestingly, the rules in the UK don’t specify that holdings are disclosed, unlike the US, where the SEC requires mutual funds to disclose holdings on a quarterly basis. Some managers do make them available, but it remains relatively rare, and in some cases only on request.
The playing field also isn’t level. My fund research team at Quilter Cheviot, and I’m sure many of our larger peers, have ready access to this information on a monthly basis, and use it to inform our views on everything from how to blend funds together to whether a manager is investing according to our expectations. Occasionally you hear comments to the contrary, such as Hargreaves Lansdowne, who have been quite vocal about how their lack of sight of holdings from Fundsmith prevented them from recommending the fund, but we don’t have that issue. Personally, I think for the benefit of all, great transparency most likely outweighs the negatives for most managers. That said, there is a big difference between accessing holdings and being able to effectively aggregate portfolios together without the right tools, so this isn’t to say that this represents a full solution for individual investors.
But let’s return to the Ukraine crisis. In this case, investors wish to know whether they have exposure to Russia within their portfolios, a much more basic ask. In the most part, this sits in Emerging Markets funds, but we do find it in other areas such as global value funds, resource funds and gold equity funds for example. In many cases these have had their valuations marked down to zero, in line with the decision made by the major index providers. It will be interesting to see what the second order interest from here is though.
But what about companies that are perceived to not be doing the right thing when it comes to Russia, and continuing to trade with them? This speaks to work on ESG that funds are doing, but equally investors may wish to have that transparency. I do also wonder whether we will move to an era where investors are ever less tolerant of companies and countries which do not fit with their values, perhaps some of the more controversial regimes.
It may be too soon to make conclusions from current events, but I sense that knowing what you are invested in will become ever more important for all investors, and the fact that this isn’t possible today in our informational age remains an anomaly. I for one think we need to continue to improve in this area.
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