For the small investing getting the right information is
paramount, but difficult.
There are ways in which ordinary investors can help
minimise their chances of buying into an unsafe paper
asset such as an
investment trust or unit trust or other
type of fund.
Try asking?
1) What investments are
currently held in the fund?
This should give you a clear idea of the kind of fund
the manager is running. If you do not understand the
answer, this may not be the right fund for you.
2) Has the fund got a
clear investment strategy?
Again, what you are looking for is clarity. If the
advisor cannot explain the strategy clearly, or you
cannot understand how the investment works, then leave
well alone.
3) How does the fund
measure risk and how risky is the fund?
Investors are entitled to know how risky a fund is
before putting money into it and to be reassured that
the managers have a proper measure of that risk. Also
ask, does the fund manager invest his own money in the
fund? If he does not invest at least some, then it is
usually best to avoid the fund.
4) What are the full costs of
investing in the fund?
A really crucial question which may make some advisors
and fund managers wriggle. Hedge fund managers in
particular can charge performance fees of up to 20 per
cent of profits.
5) Does the fund have a
published track record and if so what is it?
Another crucial question. While performance data for
standard UK-domiciled equity funds is quite easily
obtainable, it is more difficult to obtain a clear
picture of how hedge funds or offshore funds are
performing.
6) How easy and quick is
it to get my money out if I want to?
This is a particularly apposite question for property
finds or hedge funds - and the answer can sometimes be:
not for several months. How much will it cost to get my
money out?
7) What is the fund's
system of asset allocation?
A useful check to ensure that the fund manager has a
clear sense of direction and is not simply making it up
as he or she goes along. Also check if the fund has lots
of holdings in other funds, this is not a good sign as
it may suggest that the purpose of the fund in part is
to support the price of other funds. This may work in
good times, but in bad times it is disastrous as all
funds will sink together when the market falls. If one
goes down, they all go down.
8) Who is the fund
manager regulated by?
If the answer is no one then be very wary of investing
your hard-earned cash.
9) To what extent am I
protected if the fund goes bust?
Again if the answer is not at all or hardly at all, then
you should not invest unless you are an investor who is
willing to lose everything.
10) Who supports the
fund team, such as bankers and accountants?
This apparently innocuous question can set danger signs
flashing. For example, if the accountancy firm auditing
a very large fund is a very small firm, as was the case
with Madoff’s fund, then that should set the alarm bells
ringing.
If you do not have a financial advisor and you are
investing directly in a fund, do not be afraid to ask
the fund manager the very same questions.
Remember, it is your money you are investing.
So always take professional advice before you invest in
anything.
