‘What retail investors,’ (that’s you and I, by the way) ‘need is a stock market crash before Christmas.’ This cheerful seasonal greeting comes to you from Diana Mackay, a co-chief executive of fund research firm Lipper Feri, on behalf of the whole European fund management industry.
Sorry, Di, but speaking as one who has already had a year to forget, investment-wise, a stock market crash is the last Christmas present I want. But then the priorities of the fund management industry and its customers diverged many years ago and are now almost at polar opposites. What you and I want is a decent investment return delivered at a low cost. What the fund management industry wants is to rake in funds from confused and increasingly desperate savers, and rip out whatever level of charges it can get away with.
If you want to discover just how far up its own backside the fund management industry has travelled, then my advice is to read the FM section of the Financial Times, published on a Monday. You will probably find that once is enough because apart from being irritated by the pomposity of overpaid fund management executives, aghast at their flagrant self-interest and confused by the sheer complexity of what should be and once was the rather straightforward job of looking after other people’s money, you will be depressed by the knowledge that the investment business that was once an exciting and intellectually stimulating challenge has been reduced to a joyless and increasingly bewildering exercise in marketing.
Nothing illustrates this nonsense better than the front page article (FT FM December 10th). This describes the miserable investment performance of so-called ‘absolute return’ funds. To remind you what these are all about, here’s a brief history lesson.
In the old days – prior to the 1980s, roughly speaking – customers expected their fund managers to make money. In other words if they gave their fund manager £1000 they expected it to grow into something more than £1000 in future years. A not unreasonable expectation, I am sure you would agree.
Then investment consultants appeared on the scene. They noticed that the average fund manager was delivering a return below that of the market index. So ‘index funds’ were devised. Nice idea – except that when the stock market fell at the start of this decade index fund investors found that they were locked into a falling market with no hope of anything better.
Absolute nonsense
Cue for ‘absolute return funds.’ These were supposed to deliver a positive, or ‘absolute,’ return come hell or high water. In fact they were supposed to achieve what fund managers had been trying to achieve in the good old days – with the difference being that this new generation of absolute return fund managers expected huge performance-related fees for doing their job.
Now we have a few years worth of evidence with which to judge these new masters. And it is utterly damning. Having failed to keep pace with the markets when they were rising they have dismally failed to avoid losses now that the markets have turned. All those much vaunted, computer-generated investment models sold on the basis that they could give all the joy and none of the pain are now losing money.
As Randal Goldsmith, of Standard & Poor’s Fund Services, succinctly puts it, ‘Absolute return funds have not protected investors in these markets… recent market conditions have exposed the flaw in absolute return investing, which is that guaranteed returns over cash rates are not really compatible with investing in risky assets.’
What can you do but laugh? Has it taken several years and billions of pounds worth of gullible investors’ money, punted away to the huge monetary benefit of the fund management industry, to introduce a new generation to this ineluctable fact?
Perhaps the herd had better all charge back in the direction of indexed funds. Page 6 of the FT supplement has a long article about Standard & Poor’s which, it says, is ‘leading the way in index design and creation.’ Note the choice of words here. Design and creation. It makes this deadly dull quarter of the fund management industry sound as if it is vaguely artistic, and producing something of value. In fact all S&P is doing is calculating hundreds of benchmarks against which the performance of fund managers can be measured.
Number of staff at Standard & Poor’s? 8,500. Who is paying for them? All those muddled investment fund trustees who don’t really understand what their fund managers are up to and have no idea whether they are doing a good job or not.
Marvellous isn’t it? I mean I do genuinely marvel at the ability of the fund management industry to pull the wool over the eyes of their clients, to endlessly invent new ways of taking a slice out of the nation’s savings. No wonder investors are all in a muddle. But in such a muddle that we actually wish for a crash before Christmas? Even Scrooge would not go that far…
Regards,
Tom Bulford
for The Penny Sleuth
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