We’ve got used to thinking of fund managers as the kings of the lot. They are at the top of food chain in terms of pay and the respect offered them by the rest of the financial community.
So the decades long debate about active v passive , has not been a discussion on the value of fund management, but of the type of fund management we employ.
The FT is currently running a piece about the continuing long-term trend towards passive management . As John Ralfe points out, this is not much of a story. But what makes the piece compelling, are the assumptions implicit in the comment of fund managers and their acolytes. According to Amin Rajan of Create, the shift to passive is partly due to
“market distortions caused by quantitative easing programmes of central banks introduced in response to the 2007/08 global financial crisis”.
When Rajan goes on to consider the future, he sees the natural order re-asserting itself.
“Passive investors can suffer full market losses when the market turns, possibly more than active investors who can switch into cash,”
By comparison, the pension scheme managers who responded to Create’s services, prefer to comment anonymously, possibly out of fear of fund managers who they employ! Their comments are very revealing as they fundamentally question the value of fund management.
“There is a one in 20 chance of picking a successful active manager. The chances of picking multiple good ones are minuscule,”
Another funds purchaser points out
“Fees have become the North Star of investing,”
Fund managers are comfortable describing these purchasers as “clients” and talking in abstract terms of the issues of agency, but those who are buying their servicers talk a much simpler language. They talk as customers purchasing a service that is increasingly commoditised.
The demystification of fund management
As soon as people can imagine their fund managers sitting on the toilet (my definition of commoditisation), they realise that they are no different from themselves.
I had the pleasure of having a few drinks with a senior funds salesperson the other night. We talked about budgets for client’s conferences. Mine is £6- 12,000, hers is £250,000. She sits on a finer grade of porcelain.
How can fund managers consider spending 20 times more per client than I do? The answer isn’t easy without knocking into awkward questions about incentives. It is extremely hard for fund managers not to spend the money. The ridiculous complicity between the controlling “agent” and the supplicant “master” means that neither is prepared to speak openly about the very obvious elephant, that fees are way too high.
In order for the masters to continue to be entertained, the agents must invent ever more extravagant arguments to demonstrate how impossibly difficult it would be , for the agents to do without them. The result is such bamboozlement that purchasers as powerful as NEST, sign non-disclosure agreements with fund managers, rather than publicise the fees they are paying.
Such NDAs are usually justified on the grounds of “favoured nation status” having been granted the purchaser. This ridiculous phrase suggests to the purchaser that he/she has become a super-buyer, whereas he/she is almost certainly being taken for a ride and is being laughed at back at the fund managers. The only word to describe purchasers who sign up to NDAs on fees is “MUG”.
The demystification of fund management appears to be in nobody’s best interest, least of all consultants – who not only benchmark their outrageous fees against fund managers, but have now started charging fees to clients as if they managed the assets themselves.
The unholy triangle that locks purchasers, advisers and manufacturers into high fees is cemented by mystification of investment management. If the Asset Management Market Review is to achieve its goals, it has to take on the pseudo complexity created by fund managers , reinforced by consultants and accepted by purchasers in exchange for a “free lunch”.
What the move to passive does.
Despite the desperate attempts of organisations such as Create and the Investment Association to prop up active management, it’s quite clear that the game is up.
Customers are clearly less than impressed with the outcomes from paying fund managers to mess about with their money and are much keener on a simple approach that gives them secure and well governed access to capital markets.
Paying for that access is not difficult, working out what it costs isn’t hard and understanding whether the job has been carried out properly, quite easy to do.
What the move to passive does is put the owners of the money back in charge. It takes the mystery out of the fund management process and cuts back the arguments for fund managers to be considered kings of the lot. It trims the budgets for conferences, reduces the arguments for expensive city offices and returns value to the people and organisations paying for their or others retirements.
Fund management is over-rated
Frankly, fund management is a bit of a racket. The best fund managers (like Terry Smith) do very little, the worst are filled with a passionate conviction they can beat the market by adopting complex strategies like GARS.
In the middle is a muddle of managers just getting by, relying on weak purchasers not to call them out. From the look of the FT article, the mugs are in the descendent and pension fund managers are increasingly turning their back on poor value fund managers (and their lackey- consultants).
If this continues to be the case, there is some hope that consumers will get back control of their money and what they pay for it. The value for money debate has only one way to go.
The Create survey has published these highlights.
With fees becoming the North Star of investing, passives are reshaping the investment universe (58%)*
Their rise is a foundational change in the way pension plans now manage their portfolios, blending actives and passives, knowing that both are needed (60%)*
This broader diversification aims to not only minimise risks but also maximise returns to create an all-weather, buy-and-hold portfolio (51%)*
Passives are not only becoming a core asset class, but are also being used to access specialist asset classes, secular investment themes and cyclical risk factors (48%)*
Passives have benefitted significantly from the ultra-loose monetary policies of central banks, which have created epochal challenges for actives to up their game (54%)*
The unwinding of these policies is expected to have some effect on passives, more likely a slowdown in growth than a sharp reversal in their inflows (42%)*
Far from being polar extremes, actives and passives are complementary. Each relies on the other to survive and thrive, like yin and yang in Chinese philosophy (60%)*
Another test for passives will be when they are judged not on their current inflows but on their resilience when the inevitable correction comes (55%)*
For now, the real debate is not about actives vs. passives but about how to drive out mediocrity in the investment landscape. The rise of passives has kick-started that process (58%)*.
* Cited by percentage of our respondents