Why do we need funds?

James Coney, formerly of the Daily Mail and now of the Times is a campaigning journalist who says it as he sees it- and that’s refreshingly transparent

He is asking in an article the question that’s in the title of this blog. His starting point is this statement.

Open-ended investments, more commonly known as funds, are in the middle of an existential crisis. Right now, low-cost trackers and investment trusts look like much better products because funds seem fundamentally flawed in their design

James ends his recent piece in the Times

The IA (Investment Association) is boldly plotting a way towards better transparency, but I don’t really think its members are on board.

It must start from the principle that investors are entitled to have full details of what assets are being held — not what extra information they should be allowed to have.

It is, after all, our money — not theirs.

James is kicking off from the problems investors are experiencing with the Woodford Equity Income fund.

But he seems to be questioning what it is that we’re getting from funds that justifies the assumption we should use them.


Funds – the great feeder

I had this conversation with a couple of gents from an insurance company who were asking me what bits of financial services we could do without.

I said “funds” and they blanched.

Funds are indispensable to the financial services industry but not – it would seem – to its customers. Funds are a source of income for fund managers, asset managers, custodians, lawyers, accountants, brokers, ACDs, traders and platforms. I think I could write a lengthy blog just on the retinue of flunkies who feed on funds

When you think what a fund is – (a collection of investments offering people easy ways to get your money in and out of investments) – it really shouldn’t be so hard.

Take funds out of the equation and a whole bunch of people would need to find new ways to get fed.


Is there an alternative?

It is extremely hard for investors to avoid funds but there are ways. People can invest directly into the stock market, or they can buy shares that passively replicate the stock market (ETFs) or offer investment through a shareholder trust (investment trusts). These alternatives are frowned upon by fund managers and it is easy to understand why,

I am not convinced by the transparency of investment trusts and ETFs any more than I am by most funds. But they do at least present a challenge to the fund management industry.

What I hope for is wholesale reform of the funds industry that will allow us to properly understand what we are investing in. This should not be as hard as all that, but as we have seen with Woodford, a list of holdings can be bait for hedge fund managers to prey upon funds that are in the process of changing these investments.

People like Dr Chris Sier, who has pressed for better standards of reporting, are now actually enforcing better reporting. But ordinary people are still a way away from properly understanding what happens with their money.

The alternative to not knowing – is knowing. People have a right to know where there money is invested and if we had the courage to tell them, those people who manage funds might get a pleasant surprise.


The alternative

We shouldn’t do away with funds, but we need to start thinking of funds as things that help investors rather than things that pay the people who run them.

As James Coney points out

Investment firms dish out information like gruel in a poorhouse and we’re made to feel grateful for what little we get. Don’t dare ask for more.

The point is this, telling people what is going on is not bad news for fund managers, unless they have something to hide. The good fund managers do not hide and already Chris Sier’s ClearGlass organisation is listing managers who do a good job.

Many Independent Governance Committees report that they are still having trouble getting the information they need to discover if funds are giving value for money.

Organisations like AgeWage are able to show people the value they get for their money, bypassing all the complex reporting and just comparing money in and money out.

Both ClearGlass and AgeWage have been criticised by making the complex simple. But the truth is always simple.

The alternative is simplicity and it comes through transparency.

About henry tapper

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