In the times, when portfolio managers are highly criticized for chronically losing their benchmark indexes and European Union is reforming its policies on financial companies’ transparency, the asset management companies should strengthen the relationships with stakeholder groups. Customers are one of the most important stakeholder groups for financial companies and their knowledge about investing is growing. As it grows, they realize that the most important matter for them to know is how much money they will earn from the funds. This is why it is important for financial companies to offer customers more alternatives for estimating the risks and returns from the funds.
Fund Return is a standardized way for asset management companies to show the performance of the funds. It is a geometrical figure, which shows the performance of one currency unit during a measured era. Generally, the figure includes a benchmark index to which the fund return is compared. Below is an example of a Fund Return indicator with its Benchmark Index.
HCP Focus – Historical Performance of the Fund Compared to its Benchmark Index.
The purpose of the thesis is to find out whether Finnish asset management companies use Investor Return as an indicator to measure customers’ income in euros. My own assumption was that asset management companies do not use the indicator in any way. In the thesis, I interviewed staff from several asset management companies. All in all five companies agreed to give an interview. Two CEOs, two portfolio managers and one manager of development and growth took part in the research.
The outcome of the interviews was that all the participants were familiar with the idea of Investor Return. One CEO uses the indicator to show the performance of funds customer-specifically. Also, one of the portfolio managers told that in a company he worked before they used the indicator as a part of “superior portfolio report” shown customer-specifically.
None of the companies the interviewees represented were using Investor Return in ads and brochures of their funds. One of the interviewees noted that the indicator would be too complicated for customers to understand. He thought that customers need to know all the useful information on the funds but in a clear and understandable way. Another interviewee said, that he would recommend the indicator only for professional customers who understand the idea and terminology of the matter. Also, one interviewee raised a broader problem of the indicator. He thought, that since the portfolio managers are often compared to benchmark indexes, Investor Return wouldn’t be comparable to any indexes and this why it wouldn’t be a useful tool to compare portfolio managers’ performance.
The most important point of the theories in the thesis is the debate between two different ways of measuring the performance of the funds. Investor Return is a good tool to tell the customer how the average investor performed during an era. However, it’s not the best tool to measure the performance of portfolio managers. Portfolio manager can’t control the asset flow in and out of the fund. This why Fund Return shows the performance of the manager better compared to Investor Return.
Customers’ returns from the funds lag the fund returns globally, which is shown in Morningstar’s Mind the Gap (2017) research. Fund Return indicator is not affected by investors’ timing ability. Then again, Investor Return indicator is. Below is a figure, where one can see the reason for investors losing money also in a well-performing fund. The Fund Return only shows how one currency unit has performed during an era. It doesn’t show how investors in the fund have performed during the same era. This is how Investor Return would show different data in a well-performing fund, in which investors make net losses.
Investors’ net losses in a well-performing fund.
The figure leads to the main points of the conclusions. In my opinion, one of the most important tasks for an asset manager is to counsel the customer in investment decisions. The manager should consider the risks of the investment with the customer for example in a sales negotiation. Investor Return would be a good figure to show the customer to point out the importance of a customer’s timing in the fund. The indicator would be useful when the risks of the funds are discussed. Also, it would give the customer a chance for broad observation of the fund’s performance if the Fund Return is shown to the customers with the Investor Return. The combination of the two indicators would show the performance in a diversified way. A Customer would be able to make more considered investment decisions after seeing, how other customers have performed in the fund.
In addition to the matter that Investor Return would calm customers’ desires to buy and sell when the markets are changing, the indicator shows the reality in the historical performance of funds. Theories of the thesis brought up a question of merging funds. Funds are being merged sometimes as a result for asset management companies needs to arrange and organize the funds. The criticism of the funds’ merging showed that sometimes the companies are willing to hide the past performance of the funds. By showing only the Fund Return indicator this kind of procedure would be possible. If the Investor Return indicator would be shown with a merged fund, it would show the true returns behind the new merged product.
Investor Return is an indicator which shows the average investor’s income in euros. If it were shown for the customer fund-specifically with the Fund Return indicator, it would give a comprehensive picture of the fund’s performance. With the help of an asset manager, the indicator would be easily understood, and it would give precious information to the customer. Also, the indicator could lead to longer-lasting customer relationships for the asset management companies.
My suggestion for Helsinki Capital Partners is that they should use the Investor Return indicator fund-specifically in funds’ ads and brochures. It would also be good to show the indicator fund-specifically in annual reports.
About the Author
”I did my internship at Helsinki Capital Partners in summer 2018. It was an extremely interesting and educating experience. My interest in the financial sector was greatly increased during the summer and I decided to write my thesis for the company. I’m studying my fourth year of International Business in Vaasa University of Applied Sciences. Due to the extended scale of the program, it was relieving to notice my passion for finance.
As I was asking the subject for my thesis from HCP’s CEO, Tommi Kemppainen, he responded before I could even finish my sentence. The title came to be Investor Return as a Numeric Indicator for Stakeholder Group Customers. Tommi noted that a responsible company must take care of its stakeholder groups and especially its customers. The main purpose of the funds is to create good returns on a rational risk for customers, and therefore, Investor Return is one of the most interesting numerical indicators.”
— Ristomatti Jönkkäri
Comments from the CEO
”We are grateful for the analysis by Risto-Matti. For us, it is important to follow that our three funds create monetary value for our clients. As of 31.12.2017, the investor return is now a total of 18.9 mln euros. We have yet not published this data more frequent nor on fund level as we think the consept is still novell for many and there is a risk of misunderstanding. We are looking to build on this first step which is publishing the aggregate number of euros created to clients since inception.”
– Tommi Kemppainen, CEO