Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 278

Investment flows and the trifecta of desire

I started my current role as Platinum’s investment specialist in 2013, representing the investment team I had previously been a part of, to advisers. I spoke to a wide range of clients trying to determine their needs. After a process of collation and reduction of countless notes into lists of words, headings and subheadings it struck me that three things came up again and again – Performance, Connection and Simplicity – the “trifecta of desire”.

We all now know that our biases affect investment decisions. But they also affect investment communication and a simple question captures this for me. A lot of meetings begin with advisers enquiring: “How are your flows?” It’s simple, and it’s about connection. It's the herd mentality in action, and they are really asking, "What are others doing?", almost as if others’ endorsement is a critical requirement. Less obviously, it’s all about performance.

1. Performance

Strong performance is desirable and should be sought, but not chased. Finding a rare and genuine edge in delivering long term performance for clients is the goal of fund selection.

But, flows do not and cannot predict future performance. This is recency bias at its worst; industry surveys and our own data confirm that collectively consumers chase past performance. The relationship is alarming.

Recent past performance is a very strong predictor of flows. I use an algorithm[1] to track this as it helps me empathise with clients. I know when people are likely to take money away, or give us more. It's an emotional rollercoaster.

The simple fact is that the best managers are not always the best short-term performers. Staying the course is the challenge. Discerning between process and outcome is hard. The industry ('sales and marketing') focus is on outcomes; good outcomes sell funds, processes remain conceptual. Despite its triteness, it’s right to disclaim that “[recent] past performance is not a reliable indicator of future performance”.

Performance is based on a single sequence of events. No one can measure a portfolio in advance yet risk analysis uses realised historic outcomes to model possible future ones. Successful managers buy cheap stocks and sell expensive ones but expensive stocks can rise and cheap stocks can fall (witness 2018!). So sound processes will often deliver poor outcomes and vice versa.

But at softer times, clients ask the tough questions, and Connection and Simplicity become important. The risk is that these are 'tools of selling' at odds with 'tools of investing'. They open us up to exploitation.

2. Connection

Connection is a basic human need. We feel exclusion as acutely as physical pain so fitting in is very important. The herd mentality is well documented.

Influence guru Cialdini cites seven 'weapons of influence' with four directly relate to connection - reciprocity, liking, social proof and unity. Strong connections are essential for the persuader.

Salespeople know 'How to win friends and influence people': Listen, take an interest, smile and use peoples’ names but above all, avoid disagreement. Yet most successful fund managers are contrarian. Bringing an opposing message is a tough starting point. But unless active managers take on the market, they will be replaced by index funds, which naturally attract flows in rising markets according to my algorithm, and the evidence of recent years!

Motherhood statements like “Apple is a good company” could be exploited as sales tricks. No one can disagree and subtly most equate good companies with good investments. By making statements that can’t be challenged, we win people over but may not make them money (ironically, Apple has!). Connection is aided by agreement but successful investing is about challenging consensus thinking.

3. Simplicity

Simplicity is helpful – the world is a complex place. Portfolios are hard to distill down to key drivers, so stereotypes make life easier. We can’t model all possible outcomes but they can lead us astray.

Remember that if your business could be written as a set of simple steps, a computer will eventually replace you. That’s robo-advice for advisers, that’s smart-beta for fund managers.

But look around you today - simple slogans, logos, promises, hopes and dreams. Just do It! Make America Great Again! We are all easy prey, for manipulative marketers, predatory politicians and mercenary media moguls. Our industry exploits this via personification (celebrating individual star fund managers despite teams producing better results), slogans (such as disruption), familiarity (the cause of home-bias) and storytelling (usually about stocks that have already performed).

People like asking questions that can be answered and tracked. “What’s your economic view?” is easier than examining useful but more abstract portfolio characteristics.

Simplicity misses the psychology of successful investing. The best investment decisions are the most uncomfortable, and at the time, they often sound crazy. If tough ideas are presented coherently, we don’t convey this angst. The entire existence of active managers relies on rare talent for exploiting uncertainty, disagreement and complexity. Machines will replace the simple and those who simply agree with the market.

In my view, 'tools of selling' are at odds with the 'tools of investing'.

To balance the trifecta of desire, investors will benefit from remembering to consider the following two points:

  • Acknowledge the relationships between luck and the short-term versus skill and the long-term
  • When meeting fund managers, replace questions such as “How are your flows?” and “What’s your economic view?” with the critical “What is your edge?” and “Why will it persist?”

 

Douglas Isles is an Investment Specialist (Retail) at Platinum Asset Management. The above information is general commentary only. It should not be construed as investment advice or any form of financial product advice as it does not take into account any particular investor’s investment objectives, financial situation or needs.

[1] I simply average 4 numbers – the 1 and 3 year absolute returns of the fund, and the 1 and 3 year returns of the fund relative to the appropriate index. The correlation with net flows over the next six months is striking.

 

RELATED ARTICLES

Fighting the last war

Investment forecasts: foresight or folly?

10 tips for choosing a managed account

banner

Most viewed in recent weeks

Australian stocks will crush housing over the next decade, one year on

Last year, I wrote an article suggesting returns from ASX stocks would trample those from housing over the next decade. One year later, this is an update on how that forecast is going and what's changed since.

Taxpayers betrayed by Future Fund debacle

The Future Fund's original purpose was to meet the unfunded liabilities of Commonwealth defined benefit schemes. These liabilities have ballooned to an estimated $290 billion and taxpayers continue to be treated like fools.

Australia’s shameful super gap

ASFA provides a key guide for how much you will need to live on in retirement. Unfortunately it has many deficiencies, and the averages don't tell the full story of the growing gender superannuation gap.

The nuts and bolts of testamentary trusts

Unlike family trusts, testamentary trusts are activated posthumously, empowering you to exert post-death control over your assets. Learn how testamentary trusts offer unique benefits and protective measures.

9 lessons from 2024

Key lessons include expensive stocks can always get more expensive, Bitcoin is our tulip mania, follow the smart money, the young are coming with pitchforks on housing, and the importance of staying invested.

Are mega super funds’ returns set to fall?

While the performance of the largest super funds has been admirable, they’ve become so big that it will make it difficult for them to outperform their benchmarks in future. It will be important for you to pick your fund wisely.

Latest Updates

The 20 most popular articles of 2024

Check out the most-read Firstlinks articles from 2024. From '16 ASX stocks to buy and hold forever', to 'The best strategy to build income for life', and 'Where baby boomer wealth will end up', there's something for all.

Shares

2025: Another bullish year ahead for equities?

2024 was a banner year for equities, with a run-up in US tech stocks broadening into a global market rally, and the big question now is whether the good times can continue? History suggests optimism is warranted.

Strategy

Is travel your best investment?

Is travel a luxury or a priceless investment? Reflecting on decades of family adventures and solo journeys, this explores how intentional travel creates cherished memories, meaningful connections, and personal growth.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.