SOMETHING FOR THE WEEKEND
Investors.
For readers outside this sceptred isle, the big financial story here in the UK this week, aside from the Budget, has been the merger of two of our biggest asset managers, Standard Life and Aberdeen. Investors.
No one likes to see people lose their jobs, but as you could imagine, I’m pretty bearish on Scottish fund management. Right now its prospects look about as bleak as North Sea oil.
For a while the industry tried to peddle the myth that active management failure was a purely US phenomenon. But evidence from the likes of Cass Business School, S&P Dow Jones Indices and now even the Financial Conduct Authority clearly shows that our own highly paid money managers are little or no better than their colleagues on Wall Street at beating the market after costs.
Podcast Episode 11: ETFs — good or bad?
The subject of this week’s TEBI Podcast is the ETF, or exchange-traded fund.
ETFs have been all the rage in recent years, soaring in popularity all over the world. In the US, a total of $124 billion has poured into ETFs in the first two months of 2017 — the the most aggressive start to a year since the industry was founded 24 years ago.
I’ve been talking to Nizam Hamid, European ETF strategist at WisdomTree, to get his perspective on a range of issues.
Monkeys really do make better investors than humans
It was Burton Malkiel who famously said in his his 1973 bestseller, A Random Walk Down Wall Street, that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”
But, after costs, assuming he only gets paid in bananas, our visually challenged primate friend wouldn’t only beat most active investors but most passive ones as well.
Let me explain. Those clever people at Cass Business School have been looking at different ways of constructing an index. Back in 2011, a team led by Andrew Clare published research on the then relatively new phenomenon of “smart beta”, or alternative equity indexing as Clare and his colleagues prefer to call it. Their research demonstrated that, for the period from 1968 to 2011, all of the smart beta approaches to US equity investment they explored produced superior risk-adjusted returns to those generated by a comparable, market capitalization-weighted US equity index.
Less than faithful stewards
Another day, another piece of evidence that the UK asset managers are less than faithful stewards of the nation’s retirement savings. Actually, scratch that — another press release has just landed from the Financial Conduct Authority, detailing a second area in which the industry’s failing. Wow.. Two official rebukes in one day. Even by the standards of the British fund industry, that’s pretty impressive.
The first rebuke regards dealing commissions. This is a complex and murky area. Suffice it to say that dealing commissions are worth about £3billion per year and there’s been concern for some time that customers have not been getting a fair deal in the way they are handled.
An example of this is the widespread use of dealing commissions to pay for corporate access or investment research — in other words, passing on to the customer an expense that really should be met by the asset manager.
Buffett: The simple math that means indexing MUST win
I don’t know about you, but I’ve read just about enough articles about Warren Buffett just lately.
As happens every year, there’s been a huge response to his latest letter to Berkshire Hathaway shareholders — much of it from money managers, brokers and consultants who pretty much worship Buffett most of the time, but get very uptight when their poster boy’s public pronouncements start to threaten their business models.
But please allow me one more post on Buffett, because it was interesting him, in an interview on CNBC, boiling down the whole active versus passive investing issue to simple arithmetic.
Also worth reading
Manager outperformance: Is it luck or skill? (Aye Soe)
If the bull run ends on Monday, are your prepared? (Michael Batnick)
Why good companies often make bad investments (Aswath Damodaran)
Active management has its moments, but they are just moments (Tom Burton)
Investors should stop worrying about uncertainty and embrace it instead (Gary Pia)
If you’re not a professional investor, don’t waste time competing with the pros (Josh Brown)
Investing should not be complicated. Indeed it’s much better when it’s not (White Coat Investor)
The first step towards becoming a better investor is letting go of any illusion of certainty (Ben Carlson)
Podcast: The best predictor of active fund performance isn’t active share but cost (Canadian CouchPotato)
New research from Morningstar shows the the case for indexing is getting even stronger (Ryan Vlastelica)
Content for advisers:
They ask, you answer (Robin Powell)
Ignore this trait of success at your peril (Sam Lewis)
How the advice profession has stifled fintech competition (Michael Kitces)
How an evidence-based advice firm transformed its fortunes (Brett Davidson)
Podcast: How to make new information part of the financial plan (Carl Richards)
That old argument, “The price is what you pay..,” just won’t wash (Robin Powell)
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
