We Brits are a funny lot. We apologise incessantly. We love to do ourselves down. And yet there are certain things — sorry about this — at which we really are the best in the world. Or at least we like to think we are. London.
Take football for instance. It’s nearly 50 years since England won the World Cup, but just because we invented the blasted game we still expect to win it every time.
But perhaps the most glaring example of our occasional tendency to have a grossly inflated opinion of ourselves is the way we view the City of London.
It’s not a patch on Birmingham, of course, but I love London. It’s one of the world’s great cities. Yet the idea that it’s the global capital of investment expertise really is a myth.
Yes, London is, at least for now, the largest exporter of financial services in the world. It employs a very large number of people and makes a significant contribution to the Government’s tax receipts. But it also receives vast sums from the Treasury in the form of tax relief on pensions, and of course we all remember 2008 (or do we?) when we, the UK’s tax payers, had to bail out London’s banking sector to the tune of £500 billion.
Typical of comments I receive from British advocates of active fund management is this: “I’ve read your blogs and I’ve watched How to Win the Loser’s Game, and I can see what you’re saying. But you’re mainly talking about the US, aren’t you? Things are different in the UK.” Well, let’s look at the evidence.
Perhaps the most definitive study of UK fund performance in recent years was conducted by The Pensions Institute, based at Cass Business School in London.
Researchers examined 516 equity funds between 1998 and 2008, and concluded that just 1% of managers were able to produce sufficient returns to cover their trading and operating costs. But even those managers kept for themselves any value they added in fees, leaving nothing for the investor. The remaining 99% of managers failed to deliver any outperformance, either from stock selection or from market timing.
An argument we commonly hear used to justify obscenely large salaries and bonuses for bankers and fund managers is that the City of London needs to pay that kind of money to attract the best talent. Now I certainly don’t deny there is talent out there. But fund returns are so random and sustained outperformance so rare, that distinguishing genuine skill from luck is almost impossible. The Pensions Institute concluded that genuine “star” managers are “incredibly hard to identify”, and that it takes 22 years of performance data to be 90% sure that a particular manager’s outperformance is down to skill. The vast majority of UK fund managers, it found, were “genuinely unskilled”.
Of course that’s not the impression we’re given when George Osborne talks of the need to protect the City from EU regulation, a purpose for which Lord Hill — a former lobbyist for the fund industry — was specifically nominated as a European Commissioner. And it’s not just the Conservatives; Labour and the Liberal Democrats have also, to some extent, swallowed the same old rhetoric about London’s financial excellence and the need to shield the City from meddling foreign bureaucrats.
Personally, I do hope London retains its pre-eminence in the financial world. But, specifically regarding fund management, it has some serious soul-searching to do. The evidence is categorical, to quote the Pensions Institute report, that for most investors “it is simply not worth paying the vast majority of fund managers to actively manage their assets”.
If it really wants to be a world leader, the UK fund industry needs to serve consumers better. It needs to be more honest with investors, and indeed itself. In conjunction with our thriving financial technology sector, it needs to help investors capture market returns as cheaply as possible in ever more effective and efficient ways.
The investing world is changing. If London, the global financial capital, doesn’t change with it, there’ll be a whole host of other cities vying to take its place.