Transparency is not just about cost

There needs to be a balance of providing enough information to allow trustees to make informed and sensible decisions without drowning them in data. 

When it comes to transparency within your investments this is all about having complete clarity about what your portfolio consists of and where your money is going.

It is important to move away from the notion that clarity means a race towards the cheapest strategy

Transparency over fees and transaction costs is part of the story - and an important one given the impact this can have on an investor’s end outcomes. But that is not the only advantage good transparency can bring.

Demystifying investment strategies helps to choose between them

Transparency also enables investors to more easily understand what a particular asset or investment strategy does and how it complements those they already own.

Demystifying investment strategies through greater transparency enables investors to better choose between them, letting them build a portfolio that meets their objectives in terms of risk, return, liquidity and cost.

More complex investments are by their very nature hard to evaluate and, paradoxically, could lead to allocations that are too small as well as too large, as investors are rightly reluctant to allocate large amounts to strategies in which the risk and return drivers are unclear.

It is also important to move away from the notion that clarity means a race towards the cheapest strategy. Instead we should see it as a way of shedding light on how and why costs have been undertaken, enabling investors to clearly see how these are of a meaningful benefit to their portfolios.

Some high-cost strategies can be replicated at much lower cost; some provide exposures that already exist in the portfolio at lower cost, and some may be worth paying for to help investors achieve their desired outcome.

Setting clear objectives and risk budgets enables investors to benefit from transparency at the portfolio level, providing clear rationales for investment decisions.

Where market views are taken, full transparency allows these to be clearly identified and taken in a way and a size that helps support those objectives with clear lines of responsibility in place.

Transparency allows risk factors to be identified

To achieve a diversified portfolio, an investor needs exposure to a range of different risk factors to provide returns.

Transparency allows the risk factors associated with particular investments to be clearly identified and aggregated at the portfolio level. Some of these risk factors will be cheaper to access than others.

Accessing some risk factors will require trading of underlying assets, which will incur transaction costs. Limiting a portfolio to the lowest-cost risk factors only will limit the diversification that can be achieved, and thus the amount of return that can be generated for a given level of risk.

Transparency allows investors to clearly identify both the costs and underlying exposures of particular investments, which allows them to be properly assessed in the portfolio context to give the best net returns to the investor.

So what is the solution? This is clearly a complex area and no single answer is going to work for all investors. However, we welcome the Financial Conduct Authority's paper and hope it focuses on putting together a solution that has members’ best interests at heart.

Ultimately, transparency is not just about costs; building a portfolio using transparent objectives, strategies and market views enables investors to gain a better understanding of the risk and returns of their investments.

Dan Mikulskis is head of defined benefit pensions at consultancy Redington