The latest Morningstar asset-flow figures are frightening
Chart -FT
They show American investors deserting high-cost active fund management for Vanguard, a predominately passive fund manager with a mutual structure that puts the investor first.
Vanguard’s gain is at the ruination of more established players
If you take into account inflows from ETFs, Vanguard’s inflows are $288bn, a staggering sum of money.
Normally, such seismic shifts in the market would be a matter for concern for regulators, but I can only see the FCA impressed by what appears a consumer driven phenomenon.
Not only is Vanguard radically cheaper than market benchmark costs but it is a brand that is trusted for delivering what it says on the packet. The FCA’s Asset Management Market Study accuses the active management industry of over-charging and under-delivering.
Could such a shift happen over here?
The UK fund market is not consumer driven , it is driven by advisers. That is why you rarely see fund managers talking directly to their customers. The UK investment industry is organised around platforms through which investors access funds. Pension Funds tend to use insurance platforms which parade insurance funds (known as pooled funds). Wealth managers use non-insured platforms and OEICs. individuals sometimes buy funds boit from asset managers but directly from stock exchanges (exchange traded funds and investment trusts). The percentage of investors investing directly has been shrinking (which may be because it is diluted by the huge influx of wealth from the baby boomers which is now managed via platforms
What we have in the UK is a highly intermediated market with advisers taking around 1% pa of assets as a fee for their services, the platform typically costs an extra 0.35%.
The cost (OCF) of a Vanguard FTSE 100 Tracker Fund is 0.09%pa, the equivalent Vanguard actively managed fund is 0.60%pa. These fees are massively below the average cost the UK retail investor is estimated to pay (1.0%pa + according to Nucleus’ David Ferguson.
However, if you add consider the fund management cost relative to the combined advisory and platform fee, you can see why many wealth management propositions cost well in excess of 2%pa. At a time when the cash return is below 0.5%pa and best estimates for equities are around 7%pa, it seems inevitable that the UK investor will either seek a disintermediated proposition or look for radically lower combined charges.
The rise of robo-advisers is not just a function of available technology, it is in recognition that most small investors cannot afford to risk the costs of “wealth management” -even if the wealth managers would work with them.
A more radical question is whether we will see more investors walking away from advice altogether, attracted by direct offers such as those that can be found here https://www.vanguard.co.uk/adviser/investments/product.html#/productType=etf
Advisers and fund managers hold their breath.
After a generation where the received wisdom is that consumers should take independent financial advice, are we to see a return to the direct purchasing on investment products by consumers encouraged by a new kind of Regulator? Will the charts produced by Morningstar for America be replicated in the UK in the final years of this decade?
Isn’t it odd that consumers are allowed to by 1.5 tonnes of metal with hundreds of horse power capable of moving at 100 mph and known to kill thousands of people a year without any advice?
They can also buy machines that gives them direct access to propoganda by terrorist groups around the world without advice.
Yet if they want to invest a few hundred or thousands of pounds into a fund run by regulated company the authorities made it incredibly difficult for that manager to get information into the public domain to help the consumer make an informed decision.
Transparency and information are the way a modern society works best. That is achieved by product providers informing the consumers of what makes their products tick. The mindless regurgitation of historic returns tells us very very little.
In its recently published review of competition in the asset management sector the FCA says:
“Past performance does not help investors identify funds that are likely to outperform in the future, mainly because the majority of firms do not persistently outperform.”
Yet elsewhere in the report it states:
“Some investors may choose to invest in funds with higher charges in the expectation of achieving higher future returns. However, academic research from the US and recent Morningstar research suggests that higher charging funds are not on average generating higher performance, compared to cheaper funds in the same investment category. Our initial analysis indicates that, while there is no clear link between price and performance, on average the cheapest funds generated higher returns (both gross and net) than the most expensive funds.”
On one hand the FCA says past performance is no guide to future returns then, on the other hand, it says research, i.e. historic returns, demonstrates that lower cost funds generate better returns than expensive ones. Is this not contradictory?
It certainly seems that way. Either past performance is a guide or it isn’t, you can’t have it both ways. However, there is a difference between the two sorts of comparisons. In the first case investors are considering the merits of different active funds where the competition is all about the investment process used by the various fund management firms and managers. They are not competing on price; they are competing on returns, which can only be demonstrated ex-post.
In the second example the selection criteria are based on price and processes that are simple to measure and describe ex-ante in a way that is not possible with active processes that relies on second-guessing someone making many decisions. It therefore seems perfectly reasonable to use past performance to compare different types of passive processes against each other, and against active funds as a cohort, in a way that is not possible within the category of active funds itself.
A secondary issue is the time scale used to measure funds. The problem here is the period over which the signal exceeds the noise. No one seems to have a definitive answer on this but the industry convention is three years. However, given that quantitative easing (which inflated the value of assets relative to cash generation as interest rates fell) has now been in place for nearly eight years it is reasonable to argue that anything less than ten years is not conclusive.
It looks then as if past performance, over a long period, can give us some guide to future returns when comparing costs but less so when comparing subjective processes that can only be judged with hindsight. Nevertheless, we probably did not need to be told that cheaper usually means better; especially for investors.
(these comments are made in a personal capacity only)
People need advice about the types of investments they should consider, not about the different “brands” within each individual investment market.
How could 100,000 lemmings be wrong?