How does investor behaviour impact the performance of asset management businesses and how does Platinum counteract these biases in order to deliver better investment outcomes for clients?
Asset management businesses need three things to succeed: client awareness, good client service and superior investment performance. Assets under management drive revenues. Once investors in a market segment are aware of an asset manager, investment performance primarily drives net flows (applications less redemptions), if underpinned by good client service. The chart below illustrates this tight historical relationship between investment performance and flows, using data for the Platinum International Fund.
Chart 1: Platinum International Fund - Performance vs. Flows
Investment performance also contributes to the growth (or reduction) in asset management businesses as investment returns increase (or decrease) the value of assets. While cited often, fees tend to be a focus for investors only when investment performance is weak.
Investors suffer from a multitude of biases when making investment decisions. One of the most common mistakes, as Chart 1 highlights, is choosing your asset manager based on recent investment performance. Various studies, including our own, show “chopping and changing” managers can cost a few percentage points a year. Take heed of the adage – past performance is not a guide to future returns.
This can result in a poor customer experience as implicit expectations calibrate incorrectly. Poor timing can be detrimental to an asset manager’s ability to build long-term client relationships.
These biases affecting asset management businesses also influence asset pricing. Platinum seeks to exploit the latter, aiming to deliver superior returns for our investors.
Behavioural finance has gained prominence in recent years. Nobel-prize winner Daniel Kahneman’s 2011 bestseller Thinking Fast and Slow explores this in detail. Platinum’s Curious Investor Behaviour booklet, first published 15 years ago, concisely introduces the basic principles of his work. These ideas are at the core of our investment philosophy. This revolves around avoiding the crowd, and exploring change, while thinking like private owners.
We believe behavioural finance 101 covers three key topics: social pressure, dealing with information and time, and loss aversion.
- Herd mentality
Avoid the crowd
Dealing with information and time
- Primacy/ recency biases
- Exponential v linear
- “Market coin toss”
Think like a private owner
Solving the Retirement Riddle
No Pain, No Gain
Beware of the Trifecta of Desire
'Buy Low Sell High' Sounds Simple, But Investors Need a Framework
Loss Aversion, 'FoMo', Anxiety and Mistiming
A Framework for Dealing with Change
What's on Our Clients’ Minds, and How We Play Tricks on Ourselves
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