#SFTW: Pick an experienced manager? You may as well pick a rookie
Posted by Robin Powell on October 21, 2016
SOMETHING FOR THE WEEKEND
I remember Dan Goldie, the former tennis pro turned financial adviser and investment author, telling me once that he compared belief in active management to belief in Father Christmas. That, of course is ridiculous. One of those is patently sentimental nonsense, while the other is just about credible. (It was watching that movie Flight of the Reindeer for about the twentieth time, aged 39, that I personally decided there might be something in this Santa business.)
Seriously, though, the case for using actively managed funds, is so darned plausible. The markets are complex, Mr or Mrs Investor, and you yourself are far too busy to pore over company accounts and the latest economic data. What you need to do is to find some very clever people who know what they’re doing to pick stocks for you, to switch into safer assets just as markets reach their peak, and back into stocks just before the next bull run starts.
That plausibility, combined with our susceptibility to the constant barrage of PR, marketing and seductive advertising the industry subjects us to, helps to explain why, around the world (including, even now, the United States), active management remains the investment option of choice.
Another example of something that sounds eminently sensible but actually doesn’t bear scrutiny is the idea that it pays to use an experienced fund manager with an established track record.
Hats off to Jason Zweig
I was a proud man the other day when I was presented with a Transparency Trophy at a symposium on transparency in the City.
It’s a great honour, and a testament to the skill and professionalism of my colleagues at Regis Media, who work so hard at helping me to produce The Evidence-Based Investor and our new sister blog, Adviser 2.0.
The award is also slightly embarrassing because there are so many others who would make much worthier recipients than me. Frankly, I’m a johnny-come-lately to the whole transparency issue. Fellow journalists — admittedly not many — have been telling this story for far longer than I have.
One of them is Jason Zweig from the Wall Street Journal, who’s been alerting investors to the high fees charged by active fund managers, and the poor performance they deliver in return, for more than 20 years.
Is “pay for performance” the future?
I don’t recommend that investors use actively managed funds, for reasons I’ve explained many times. But that doesn’t mean that I disapprove of active management in principle. Ultimately, we need active managers to help set prices and to keep markets efficient and, as Vanguard Bill McNabb told me last week, there will always be a place for low-cost active funds.
Better still than low-cost funds are no-cost funds — or at least funds that will only charge you if they outperform, and will refund any fees you pay if they underperform. One fund house whose fee structure really interests me is Orbis Access. In this interview, Dan Brocklebank, the head of the company’s UK division, explains how its fees work and how he expects more active managers to move to these sorts of fee models in the future.
Please note, this is not in any way in endorsement of Orbis Access, but I applaud its approach. Investors have made through the nose for underperformance for far too long.
Investing Demystified (Video 4/5)
You can pay an investment consultant a fortune to build you a suitable portfolio. Alternatively you can do it yourself and, by choosing just two investment products, you’ll have, in Lars Kroijer’s view, a better portfolio than 99% of investors.
In this, the fourth video in a five-part series, Lars explains how to construct a simple but highly effective portfolio.
Is positive change in UK asset management is on the way?
Last month I posted a video interview with Con Keating about his experiences of the fund management industry. If you haven’t watch it yet, please do so; it provides a fascinating insight.
In this, the second and concluding video in the series, Con goes on to discuss:
• his part in the setting up of the Transparency Task Force
• his views on the Investment Association’s “Loch Ness Monster” report on hidden costs, and
•his belief that the reputation of the UK fund industry has reached its lowest point and that positive change is on its way.
How prone are you to confirmation bias? (Jeff Miller)
A good financial adviser is like an orchestra conductor (David Andrew)
Two four-letter words you should teach your children (Colleen Jaconetti)
Worrying about the next recession is completely pointless (Barry Ritholtz)