Activism over activity – we want effective asset management.


Reading the FCA’s Asset Management Market Study, you’d be tempted to give up on active asset management (to be frank you might to give up on investment funds altogether).

Daniel Godfrey has a piece in the FT claiming that the FCA may have saved investment management. He points to the positive measures recommended in the review

  1. disclosure of costs and charges with fund managers- to a greater degree – underwriting costs .
  2. a requirement that funds are more clearly purposed , so we understand what value they are hoping to create,

To deliver these “sunlight measures” the FCA calls for reformation of existing fund governance in line with what  IGCs are doing.

Activism over active management

Daniel hopes that this will bring back a resurgence in active management which is becoming a niche activity for many institutional investors

His arguments hinge on the mantra “informed choice is real choice” but I wonder if alpha talent spotting is really the way to go.

If what you are after from your fund management is low cost diversification and a commitment to certain investment factors, there are all the building blocks you could ask for on the shelves of the FTSE, MSCI and other index makers.

When HSBC set out to design a new default for the £1.9bn of defined contributions sitting in its staff default fund, it started by talking with FTSE and ended by constructing a product through Legal and General which delivered on the conviction of the trustees in a certain view of the market. I would be surprised if the ongoing management of this fund cost more than 0.05%pa of assets and would hope it cost considerably less.

I don’t think that Daniel’s mantra “informed choice is real choice” had anything to do with how this fund was constructed. In fact – quite the opposite – the value add from the trustees was in the delivery of a low cost diversified investment fund (Future World) that has a clear purpose and delivers at minimal cost.

Passive managers can be activists

Legal and General have got the mandate to implement the FTSE index largely because they have made themselves expert in the areas in which the Trustees were interested. Those areas related to the environmental, social and governance agenda into which LGIM (L&G’s fund management arm) has invested considerable money.

I cannot think of  more activist  fund management unit than L&G’s sustainability unit, they are out and about meeting senior managers, voting at AGMs and generally disrupting BAU to get organisations to meet their ESG obligations.  Yet L&G is regarded as a passive manager and the HSBC Trustees are investing in a FTSE index tracked by LGIM.

Which asks me to think again about why anyone would indulge in the bespoke indices within an active manager’s head.

I’ve mentioned a couple of people who’s heads are so wise that I am happy to align my investment thinking with theirs. Warren Buffet, Neil Woodford, Terry Smith. Today I am going to Aberdeen Asset Management’s client conference and it may be that I can find some thought leadership there too.

The trouble is that the vision of a Smith,Buffet or Woodford gets diluted when an active manager starts acquiring and diversifying. So most of the big fund managers (Aberdeen included) now run money in all kinds of ways because of inherited strategies. Think of Aberdeen and Deutsche Asset Management, Scottish Widows and other investment houses that they’ve acquired.

Is it any wonder that active managers become expensive index-trackers when their business models try to be all things to all people? Most of the activity that seems to go on within asset managers is about pleasing its management and shareholders – not its clients.

The bar has been raised- how high can you jump?

The Buffets , Woodfords and Smiths are there to keep the passive managers honest. The brilliant quant technicians like Yves Choueifaty, also have a role. Smart Beta starts out as a challenge to lazy indices and then becomes assimilated into the indices to the point that organisations like RAFI and TOBAM recreate the images to give us a purer beta.

Whether through quantitative analytics or through brutal application of common sense, these brilliant people change the way in which funds are managed. But they do so by challenging us to better understand the market, not out of a pretence that they know better than the market.

These people want us all to have the market return, not to beggar our neighbours. The chase for alpha is generally futile, it is pure  honey of beta we are after,

Ultimately – we aspire to having to make no decisions – we (the public) would happily give up our funds to the market if we felt we were getting the market return. This is exactly the opposite of Daniel’s mantra that “informed choice is real choice”.

Most of us would rather not make a choice but would like to have the market return (with the decisions of how that can best be achieved left to others).

While active managers can buzz around making sure that the hive is free of gross infections, the business of fund managers is to deliver pure honey in a consistent and plentiful way. This is infact a very low level function that does not deserve to hugely reward large numbers of people.

The real challenge that the FCA is laying down to the asset managers is around their business models. Too much marketing, too many conferences, too many people in unproductive functions. There are too many people finding value for the shareholder and too few delivering value for the unit holder.

There is another way to do things, that involves making honey in a consistent and plentiful way and it’s called passive investment management.

The challenge for Aberdeen today, is to convince me firstly to spend a day with them and secondly that I should put money in their hands. The FCA has raised the bar with its (interim) Market Study. Let’s see how high Aberdeen can jump.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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