Ignore “bad “; let’s big-up good asset management!

The asset management industry will get nowhere trying to defend bad practices. It should be celebrating its success stories. We have good active managers in this country and we have good passive managers, protecting bad practice among bad asset managers does nobody any favours.

The FCA Asset Management Study will – if the FCA sticks to its guns, lead to mass redundancies in the City. As Michael Johnson has pointed out, 80% of the fund management industry (including investment consultants) are already – technically – redundant. Losing the 80% will leave a short-term hole in tax revenues (they pay a lot of tax) but it will make for a more productive financial services industry in time.

It will give a boost to the few remaining good active managers and will see in-flows into good passive funds. We should start bigging up the good managers- it is the best way to improve things.

To explain what I’m getting at, let’s look at one apologist for the current status quo talking over the weekend in the FT.

According to Mr Gillibert, an all-in fee that includes estimates of future transaction costs in advance is likely to drive fees up.

“You are asking people to decide a year in advance what they are going to be charging in advance, which is practically impossible,” he said. “For any business, if you do this you will have to allocate a kind of safety margin in case the costs are higher than expected, and then what you charge your customers might not be the true cost.”

A good  manager knows exactly what she or he is doing, has firm rules about trading and will only trade when the cost benefit analysis is in the client’s favour.

The bad manager has no idea what’s going on, how much trades are costing and trades on a hunch.

A good manager would be confident to justify trades when challenged because each trade is cost-justified and because she or he believes in activism (rather than being active),

The bad manager will pass on the cost of her or his inefficiency to the consumer because the customer does not come first, internal revenue targets come first.

If you allow Mr Gillibert’s think to become “group-think” as the Investment Association has – over the years, then you get to that most moronic of judgements “the primary objective of any business is to stay in business”.

The primary objective of the Investment Association has to keep its members in business, it is not to promote best practice among its members. That is why Daniel Godfrey left and it’s why a good man- Jonathan Lipkin- is on a hiding to nothing.

Bad businesses should not be in business, they should either become good businesses- or even better businesses. Mr Gillibert’s mentality starts with the supposition that active managers, because they are in business , are good.

We will never eliminate moronic thinking

Instead , we can only ignore bad businesses and look to invest in good asset management. I had a conversation about what good looks like on Friday with the COO of Fundsmith, one of the most successful active managers – both in terms of what if gives back members and in terms of the in-flows to its fund.

It goes without saying that Mark had a deep understanding of the cost of trades and that Fundsmith only traded when it was in the interest of the member. I am sure he would be laughing if I showed him Mr Gillibert’s statement!

When I spoke with Martin Dietz , the manager of the LGIM multi-asset fund that manages my workplace money , we had a conversation about when he would have to put up the all in fee I am paying from 13 to 14 bps (0.13% to 0.14%). He admitted that this might have to happen in 2017 due to the success of the fund which could no longer trade incognito.

My point is that we should be sticking with managers like Martin Dietz and Terry Smith and the back offices who are prepared to explain how ever penny counts and not worry at all about everything else. We cannot challenge moronic thinking- let’s celebrate good practice.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Ignore “bad “; let’s big-up good asset management!

  1. Surprised at your inclusion of Fundsmith in the “good”. 66% of its portfolio is invested in the US and it’s concentrates portfolio of only 29 holdings trade on a multiple of 6.1 times book. 2.3 times the average for the category.
    I thought your were a fan of passive, not active management.

  2. henry tapper says:

    I am a fan of good asset management, that can be active or passive. The measures you mention seem to me a compliment to the assets in which the fund invests and suggests that Terry Smith is right to be holding them. I don’t expect any holdings to be disposed of anytime soon (though Terry does sell from time to time), but when Terry does sell, he is very explicit as to why. He is very accessible and I suggest you ask him for the reasons for the high valuations of the stocks he holds!

  3. henry tapper says:

    I should also point out that Fundsmith is absurdly expensive , which gives the lie to value for money being just about money, anyone who has been invested in Fundsmith knows the value they’ve got for the money given to Terry and his team.

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