Interview with Chris Inifer by Lachlan Colquhoun
In the search for higher returns in the current market environment, complex financial products promising high returns tempt many investors.
Many of these products have slick and sophisticated sales messages that are alluring to investors struggling to achieve returns in a time of low interest rates and sluggish yields.
Chris Inifer, head of retail at fund manager Allan Gray, can understand the attraction of many of these products but sounds a note of caution.
If an investment sounds too good to be true, he says, it probably is.
And many of these products, such as so-called “alternative” asset classes and multi-income strategies, are so complex that investors, and even their advisers, don’t understand what they are actually buying in many cases.
“It is natural that with uncertainty in equity markets, low yields on bonds and expensive property prices – investors are looking at other solutions,” says Inifer.
“People will go looking for an immediate outcome rather than take a longer-term proposition, and the reality is that investors can often be lured into options which promise to fulfil short term needs, but in the long run can put their capital at serious risk of permanent loss.”
The 2008 collapse of Australian hedge fund Basis Capital stands as a cautionary tale for investors tempted by complex financial products.
Australian investors lost close to $500 million when two of the company’s funds collapsed after its strategy to invest in complex instruments called “collateralised debt obligations” turned sour. The losses led to legal action, with some investors taking action against financial advisers who had recommended the funds.
“These were products which were very well rated but misunderstood both by the adviser community and by the consumers,” says Chris Inifer.
“But thinking about the complexity of the products is not something which the research houses or the people who review products spend any time on.
“They tend to rate the strategies or the funds by category, and they don’t think about complexity in itself or how appropriate it might be for someone to have a hedge fund in their portfolio, and there is no debate on whether the client really understands what is being bought.”
Inifer’s advice to investors is to try and avoid the “short-term herd mentality” which drives many people into these complex products in the hope of “beating the market.”
“From this comes the demand for many of these products where there is a big gap between the pitch and the reality,” he says.
“I am simply advocating that people stop and think about what they are investing in and understand the full range of outcomes, particularly what can happen on the downside.”
Much of the responsibility, says Inifer, also rests with the adviser community.
“Advisers clearly feel a lot of pressure in thinking about the next solution for a client,” he says.
“They are always proactively seeking better outcomes and a lot of these products suggest in their marketing pitch that they can achieve this.
“But these complex products can magnify risks, and our view is that there is still the opportunity to achieve excellent results with a simple approach, and through properly aligning a product with the goals of the client.”
Chris Inifer holds a Bachelor of Business Economics and Finance (RMIT University) and a Postgraduate Diploma (with Distinction) in Financial Planning.