An advisor asked us the question, “how does Credo determine which asset management companies are good for investors? Is it performance? or is it risk-adjusted performance?”  A very good question. The simple answer is this: we don’t.  Instead we have advisors and investors assess Canada’s investment fund companies.  And, in the case of investors, we do it without them even knowing we’re doing it! We’ll explain.

Just the same way anyone else does, the analysts at Credo certainly look at performance.  Along with the publicly available fanfare from the companies themselves, Morningstar and GlobeAdvisor tell us what level of returns every available investment fund delivers… over every possible time horizon.  Though it’s mind boggling, everyone in the investment business has been conditioned to look immediately (and almost exclusively) at returns in one form or other.  But returns don’t really factor deeply into Credo’s assessment of a company’s performance; certainly not directly.  Instead we look at what we call “investor outcomes.”  We believe measurements of investor outcomes are the purest and most significant measured product of reported performance.

Consider this: as an advisor, for all the work you’ve done to help your clients manage their money, you’ve helped them invest in a variety of instruments that comprise their portfolio. Now, ask each of your clients: “Do you currently feel ahead of where you expected to be, financially? or are you behind?  Are you well ahead, financially? or do you feel far behind?  Or, perhaps you simply feel you’re on par with your financial expectations?” Every investor fits into one of these five categories:

  1. far behind financial expectations
  2. behind
  3. on par with expectations
  4. ahead
  5. well ahead of financial expectations

Now… there certainly is a relationship between the financial returns and reported performance of the portfolio you created for your client and their individual “investor outcome” — their feeling of being ahead or behind, financially.  But that relationship is extremely complex.  It is filtered through your client’s values, interests and needs (VINs.)  Essentially, your client’s values, interests and needs are a system of filters that “process” the reported returns and performance their portfolio delivers.  It is that process in the individual minds of your clients that produces some perceived level of “investor outcomes.”

Investors look at their statements… and they have discussions with their advisors.  They consider their situations… and they they decide… “do we feel ahead or behind, financially?”  Investors’ individual values, interests and needs are the grand filter of returns… be they short-term returns… long term returns… absolute returns… risk adjusted returns.  You name it; how the investor feels about their portfolio’s returns is a function of their values, interests and needs relative to their financial situation.  Investors consider their investment returns and decide if they are ahead or behind their expectations.

In Credo’s assessment of the investor outcomes that are produced by any given company… we make some assumptions.  First, we assume that all investors have a similar level of access to the products and services of the companies we monitor.  We also assume that all investors have their own values, interests and needs… and that these systems of VINs are generally distributed, randomly across the investing population.  This is to say… all investors prefer higher returns to lower returns… and all investors have some semblance of short, medium and longer term goals… both financial and non-financial.

We then interview investors — tens of thousands of them — and we assess their feelings of being ahead or behind, financially (among other things.)  We ascertain this before we explore which companies they have their money with.  Doing it the other way around… discovering the companies they have managing their money before assessing their feelings about their financial condition …could potentially bias their sentiment responses.

With our assumptions in place and our data collected, we have what we need to compare the investor outcomes among Fidelity investors with the investor outcomes among CI Investments’ investors.  Or the outcomes experiences by Mackenzie’s investors with investors who have their money with NEI.  Consider the analysis in Exhibit 1 below.

 Exhibit 1: Whose Investors are Better Off? CI’s vs Fidelity’s  (A Credo WIBO Report)

This analysis compares CI and Fido is based on interviews with 3,169 investors. (You can see that number in the observed frequencies table… the total is shown in the bottom right-hand corner of that table.)  The analysis shows that the difference in the “investor outcomes distribution” for CI investors is significantly different from the Fidelity distribution.  The Chi-Squared statistic (go back to you 3rd year statistics class text book) is 18.481… which is large, relative to the critical value of Chi-Squared for a 95% confidence level that there is (or isn’t) a difference between the investor outcome distributions of these two firms. With such a large test statistic, we’re able to infer that there is indeed a difference (that very likely didn’t happen by chance) between CI’s investors’ “feelings of being ahead or behind” and Fidelity’s.

(If you’re really interested in the stats, the analysis also shows that the largest contributing component of the calculated Chi-Squared statistic came from the difference in investors saying they feel far behind.  Proportionally, a lot more of CI’s investors feel far behind than Fidelity’s investors.  If Credo were an advisor, we’d want fewer of our clients feeling far behind their expectations.  Accordingly, we hope we would have invested with Fidelity rather than CI.

But (and this is a big but) we all know that, fundamentally, it’s not the companies that are producers of good performance.  Rather, it’s the money managers that each company has hired.  They are the ones that deserve the credit (or not.)  We also know that advisors generally hunt for money managers who deliver returns/performance for their clients regardless of what company the money managers are affiliated with.  At least, that’s how it’s supposed to work in a somewhat efficient marketplace …and in theory.

Truth be told, the marketplace isn’t that tidy or efficient.  The industry has thousands of people doing their best to convince advisors (and, to a lesser degree investors) that the money managers who work with their investment complex are better than the ones across the street.  When an advisor finds an asset manager they like and are prepared to work with, they often establish a relationship with the manager’s rep… the wholesaler… and begin building a broader relationship with that asset manager’s fund company.  Eventually, the advisor finds themselves working with more of the same fund complex’s money managers.  So, every year Credo asks more than 1,000 advisors to tell us if each of the fund companies they know delivers above average returns.  Exhibit 2 below presents just some of the recent results.

Exhibit 2: Advisors Perceptions of Fund Companies Delivering Above Average Returns

In Exhibit 2, advisors who agreed that the company delivers above average returns are represented in blue.  Those who disagreed are represented in orange.  Those who were fence sitters are presented in green.  We see from this analysis that EdgePoint and Mawer get the nod from advisors more than any other firms.  Purpose and First Trust… not so much.  Keep in mind that we ask this question ONLY of advisors who indicated that they have actively had the company on their product shelf; there is little point asking an advisor to comment on Dynamic’s performance if they haven’t been using Dynamic at all.  This is one of the reasons that the proportion of advisors who are detractors for the companies they support is relatively small.

Our measurements are, of course, point-in-time, visceral assessments of these companies based on advisors’ experiences.  They change slowly over time as they are based on advisors’ real experiences.  These become relatively persistent perceptions but they are far from perfectly correlated with the actual returns each company’s money managers deliver.  The correlation we find indicates that about 50% of the variability in advisors perceptions of returns is explained by actual returns.  Only 50%.  The other 50% is driven by other factors, some of which are controllable.

So, if advisors have expertise in assessing companies (and their respective money managers) with respect to the returns they deliver, should investors not respect what advisors believe? Sure they should, because good advisors do so much more than pick supplier fund companies.  Advisors who bring no more value to the table for their clients than picking funds are in trouble in the evolving advice business.  Furthermore, with the exception of a few sad companies, the wholesalers and representatives whose roles it is to promote fund complexes have noble intentions.  They genuinely want the advisors they work with to be successful.  Many of these wholesalers are very capable of bringing value to the advisors who partner with them.  Those who don’t are quickly marginalized.

Why do some advisors continue to work with the companies that are not the most favorable to investors?  That’s a good question, and there are some very good answers, too.  First of all, it’s a very substantial investment for an advisor to decide what suppliers they will work with.  That’s because most fund complexes have positioned themselves to deliver both investment instruments and valuable service.  These services are of value to advisors who are trying to manage and grow their businesses.  So, once an advisor opts to work with a company they are generally prepared to keep it on their supplier shelf for a number of years.

Over the last 20 years, product manufacturers have assumed select roles that were, to a greater degree, played by dealers.  Many aspects of training, education and business development support have been off-loaded by margin-pressured dealerships.  Manufacturers of financial instruments offer these services now, though the manufacturer’s willingness to deliver those services has often been a twisted function of the advisor’s willingness to be a loyal and contributing supporter of their firm rather than a competitor.

Advisors have to deciding what investment product suppliers they will partner with for the longer term because switching suppliers in and out of their tool kit is a costly and painful exercise for both advisors and, potentially, their clients.  And, regardless of what set of companies an advisor elects to partner with, those companies will at some times be industry darlings and at other times be industry dogs from a performance perspective. Advisors have to decide if they will wait out those cycles or jump ship, kicking companies that don’t deliver positive investor outcomes to the curb.

As advisors right-size their product shelves… they really should consider the investor outcomes a company delivers alongside both performance and the service support you get from suppliers.   Credo measures investor outcomes for our clients, i.e., companies that are prepared to share and discuss these outcome scenarios with their supportive advisors.  Ask your wholesaler for a WIBO report comparing their firm with any other.  If they have access to Credo’s research, they will be pleased enough to share it with you.  If they don’t, call us directly.  We will be able to connect you!