John Kay – practical solutions to the FCA’s problems – please!

john kay

Passive management must be valued

In a lukewarm response to the FCA’s Asset Management Market study, John Kaye comments.

 Greater transparency of charges will do little harm, but will also make little difference. Those customers who do focus on price are sensibly migrating to passive funds. In that segment, price competition has intensified and scale economies are concentrating funds into the hands of a few very large managers.

Kay  misses an important point.  Passive managers who impose no style or philosophy on their portfolio decisions are still responsible for the management of other people’s money. By dint of the amount of money they manage, they are able to influence critical management decisions and the controls within the companies into which they invest.

Passive managers are best placed to be a force for good because they have no option but to hold the stock they purchase. We should therefore be judging the value we get for the money we pay for passive management on the overall impact they make on their investments.

So with the engagement of HSBC with Legal & General to produce the Future World fund, an investor, the HSBC pension trustees, has helped develop a marketable index available at a low price to ordinary workplace pension savers. It can do this because it the trustees have the money to seed the fund and L&G the expertise to manage a fund against the guidelines of the index.

Active management must be measured

Kay makes a false dichotomy, by confining his discussion of value to active fund management.

The FCA report gropes towards the right solution for the active sector, but you have to work hard to extract it from the report, and some of the report’s recommendations actually get in the way. Asset managers should differentiate themselves, not by spurious promises of risk-adjusted outperformance relative to some broadly based benchmark, but by proclaiming their distinctive philosophy and style.

There is nothing spurious about analysis of performance using risk-adjusted measures. This is what intermediaries should be doing to help investors decide which of the investment philosophies are spurious and which are adding value.

Just as Kay under promotes the value that passive management can bring to the management of our money, so he over promotes the importance of the active manager’s value proposition.

We are judged by our actions not our words, measurement is the basis of governance and the promises of managers need to be assessed against a demonstrable proof – the proof being the eating of the pudding.

The FCA paper deserves more

This is important as the credibility of much of the FCA’s paper rests on its work towards a simple way by which ordinary people – including those who choose workplace pensions for their colleagues – can assess whether they are getting value for money.

The polarised world of private and individual investors , the former buying on price, the latter on philosophy, is not one that I recognise. It’s promotion does not add to the debate.

John Kay should cease seeking to be contrarian and lend the considerable weight of his eloquence and thinking, to the matter in hand. We need to know we are being well served by those who manage our money, the FCA paper is a big step in that direction and it deserves more than the lukewarm response it gets from the great man.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to John Kay – practical solutions to the FCA’s problems – please!

  1. Mark Meldon says:

    That’s a bit harsh on John Kay, Henry! If you have read his book “The Long and the Short of it”, you will see that he is indeed an advocate of “mass market” indexing, only then going on to suggest that individuals consider either actively managed funds or individual stocks.

    I kind of agree with this approach. Unless, say, so-called “smart beta” or some other kind of “active overlay”, then surely a passive fund can hardly be described as managed! A simple FT-SE All Share tracker fund will either physically purchase all of the stocks in the index on a market weighted basis or synthetically “mirror” that benchmark. So, you end up with most of your money in, I guess HSBC, regardless as to whether that is a good idea. I’m no fortune teller and I only have half a crystal ball on my desk (an old paperweight) but, for example, many closed-ended funds in the form of investment trusts can be a very good choice on top of a core holding of passives with, perhaps, individual stocks on top of that if the individual is so minded.

    As an IFA, I have recommended passives since they first came on the market from the likes of HSBC back in, I think, 1990 or 1991. The market has been transformed over recent years with the introduction of ETFs and low-cost funds from the likes of Lyxor, Vanguard, Amundi, iShares, etc and the price of these funds has fallen to amazing levels (0.08% for a FT-SE All Share index fund from Vanguard, anyone?).

    But, I think, and I would say this wouldn’t I, that value is a very different thing. Value can be seen by asset allocation decisions, investing in “specialist” areas like technology and “off market” assets (Scottish Mortgage Investment Trust, for example) and I would argue that at least some exposure to such choices can be very worthwhile in the long run.

    Sure, for the “mass market” AE sector indexing is likely the way to go, but maybe not for those lucky souls who have ended up with a big DC fund in, say, a SIPP. And what about DB funds – are they all indexed nowadays?


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