Convenience at a lower cost

Jonathan Davis: Anyone who tries to use the Net today for anything other than simple transactional business is likely to find it a very frustrating business
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The Independent Online

A few weeks ago, I made some mildly discouraging noises aboutusing the internet as an investment tool. My point was not that the internet is not a potentially fabulous aid to researching and managing investments. There will certainly come a time when most of us use it to monitor and make investments, and do so with a quality of personalised service that will be unrecognisable to anyone who has become accustomed to the inefficiency and indifference of your average bank or insurance company.

A few weeks ago, I made some mildly discouraging noises aboutusing the internet as an investment tool. My point was not that the internet is not a potentially fabulous aid to researching and managing investments. There will certainly come a time when most of us use it to monitor and make investments, and do so with a quality of personalised service that will be unrecognisable to anyone who has become accustomed to the inefficiency and indifference of your average bank or insurance company.

The problem is it is going to take some time to reach this happy promised land. Anyone who tries to use the Net today for anything other than simple transactional business is likely to find it still a very time-consuming, unwieldy and frustrating business. There is no shortage of good information, but whether you measure convenience, speed of access or quality of information, there are significant roadblocks in practice that you have to overcome.

To take one simple example, anyone who has tried to buy insurance online will know that it is no easy matter. Most of the sites that claim to offer competing quotes trawl through a much narrower choice of insurer than you would get by going to any half decent insurance broker, and the quality of the experience is a lot worse. Online share dealing, meanwhile, is still an accident-prone business.

Having said all this, the range and quality of information and services you can obtain from the internet is growing very fast. Two recent launches have caught my eye and I think have great potential for ordinary investors, at least for those who are prepared to put in a bit of homework, and are willing to try and confront new way of doing things.

The first is offered byRiskMetrics, which formerly masqueraded as a specialist risk management team at the US investment bank, J P Morgan. The business, which provides risk measurement services to companies and institutional investors, was spun off from the bank in 1998. It is based in New York.

Essentially the service provides a series of online tools for measuring the risk of your current or potential portfolio. It measures the historic volatility of the shares or funds you own and allows you to measure how "efficient" your portfolio is at diversifying risk. It, therefore, allows investors, for the first time, to measure some of the parameters of what they own, using modern financial theory, in the same way that professional investors have been able to do for many years.

It has to be said that, like all such tools, its benefits should not be exaggerated. Because its analysis is based on historic volatilities, which can and do change, the answers it gives you will not be 100 per cent accurate. But they will give you a completely new perspective on one measure of risk in your portfolio, and allow you to see how adding a new investment will affect such factors as the expected loss in a market downturn and the diversification value of what you own.

The new site offers ratings of UK shares and some of our market indices, but it is American in origin, and there is to date (unless I have missed something) no data on UK managed funds, only American mutual funds. But, I am sure that will change and I would be surprised if anyone who takes the trouble to work their way through the site (www.riskmetrics.com) and its short introduction to risk management doesn't find something of value in it.

A second development which I think holds out promise for the future is the launch of the Fidelity FundsNetwork. This site claims to be the UK's largest online "fund supermarket". Fund supermarkets are now commonplace in the United States but in this country have been slow to materialise. The idea behind the concept is very simple: to allow investors an opportunity to buy and sell unit trusts and OEICS from a wide variety of providers, yet do so through a one-stop convenience store, without having to complete scores of different application forms.

Although there are other sites that claim to be fund supermarkets, this one is the most sophisticated to date. The key point is while the administration and paperwork is carried out by Fidelity, you can access funds from 14 other mainstream fund management companies as well, including (I am happy to say) several index fund providers. The initial charges on most funds have been cut to levels that compare with many discount brokers and the marketing proposition is the charges that remain will be justified for the simplicity and convenience of dealing in this way. For example, investors can see what is in their portfolio and switch between funds very simply, with all their transactions being logged on a single consolidated statement. Fidelity provides a tax-free ISA wrapper at no extra cost.

Although some other fund management groups, including Jupiter and Gartmore, are planning to set up a rival supermarket, which would be excellent from a competition point of view, it seems this will not be ready for some time. Where the Fidelity supermarket hopes to score is by emphasising service qualities - convenience, reliability and value for money. The site (at www.fidelity.co.uk) looks good and is relatively easy to navigate, although the charting function proved intractable when I tested it out.

It will take time to see how well they have succeeded but, in my view, both the fund supermarket and the RiskMetrics product provide positive examples of how the internet can add value to investors. It clearly is a cheaper way of doing business, but the big payoff from the Net is really only going to comethrough delivering superior quality of service, a point which has taken some time to sink in, in a culture such as ours where service, as the Americans would know it, is still largely an alien concept.

Needless to say, no internet service, however wonderful, can absolve you from the need to make sensible investment choices. To do that requires a proper understanding of the trade-off between risk and return which, as the chart shows, remains broadly just that - a trade-off. You can't have a higher return, by and large, without greater risk, though there are periodically opportunities to take advantage of cross-sectoral periods of mis-valuation (themselves largely the result of fashion and fad).

For the last few years it is undeniable that North American and European funds have offered a materially better trade-off than any equivalent UK sector. Those who have gone for the high return specialist funds (which mainly means technology and healthcare) have also enjoyed higher returns, but at a much higher price in volatility.

For what it is worth, my current view is that of sectors which are likely to make a move across the map towards a more favourable position, the equity income sector is probably the most likely candidate for a re-rating, as Bill Mott of Credit Suisse argued plausibly on this page last week. I would expect both North American and specialist funds to move the other way in the short to medium term. Given the structural changes that are still galloping across the Continent, however, European funds may still have some scope for sustaining their place above the risk/return line.

davisbiz@aol.com

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