I’ve seen the question asked several times in recent weeks, Who will be the next Jack Bogle? Who will have the energy and charisma to lead the campaign for a better, fairer, more consumer-focused investing industry, now that Jack has gone?
For me, Bogle was a complete one-off. I very much doubt that any one person in my lifetime will have the sort of impact that he had. Yes, I’m optimistic that Bogle’s vision will eventually become a reality, but I’m sure it will be the combined efforts of like-minded individuals around the world that makes it happen.
One of those individuals may well be Tom Coutts. I must say I hadn’t heard of Tom until the other day. He’s a partner at Baillie Gifford, a fund management company based in Edinburgh. He’s just a written a paper called Riding the Gravy Train, which in my view should be required reading for financial professionals, journalists, regulators and politicians — indeed anyone with a serious interest in improving investor outcomes.
Essentially his thesis is this. Asset management has become a gravy train. It richly rewards those who work in it but not those who pay for it. We have reached, says Coutts, “Peak Gravy” — the point of the maximum rate at which the industry extracts value from its clients’ assets.
It’s a completely unsustainable situation. The industry has to change. For a start, it’s grown far too fat and needs to be considerably smaller. It also has to bear more of its own costs. It needs to show a greater awareness of its role in society, and encourage positive behaviour at the companies it invests in. Most important of all, it has to serve the interests of its clients, and provide them with clear and simple investment education that helps them to achieve better outcomes.
Most of this, I’m sure, will chime with the majority of TEBI readers. It’s a vision of the future that is almost identical to mine. The fact that it comes from an active fund manager makes it all the more relevant.
I’m not against actively managed funds in principle, and nor was Jack Bogle. What I am very much against is the predatory nature of vast swaths of active management: investors taking all of the risk and providing all of the capital, and yet having to share the bulk of their returns with people who do nothing to deserve it. Tom Coutts’ paper provides a vision for the industry we should all aspire to.
I would strongly encourage you to read the whole thing, but here are some of the highlights:
On wealth extraction
“It is our contention that the investment industry may be experiencing a peak… the point of the maximum rate at which it extracts value from its clients’ assets. Let’s call it Peak Gravy.”
On the value of global finance
“The financial industry itself creates little of value. It is a facilitator, a lubricant for the economy, helping savers to earn a good return on their money and providing financing for investment opportunities. Those of us who work within it should be humble about the role we play.”
On the industry’s self-interest
“We have never held the wider investment industry in high regard. It seems to us that most funds’ fees are too high, most so-called investors’ time-horizons are too short, and most firms operate with their eyes focused inwardly on their own interests rather than outwardly on their clients’.”
On closet indexing
“While firms trying to win business will take risks, holding out promises of differentiation and genuinely active management in order to attract clients, once those clients have been won, the manager’s emphasis shifts to protecting what they have in order to hold on to the assets for as long as possible. The simplest way to do this is to avoid taking risk by staying close to the index.”
On investment management fees
“It is a commonplace, and not only in the finance industry, that there should be a positive relationship between risk and reward. But perversely the current structure of investment management fees leaves the manager’s reward guaranteed, at least for a period of time, and the client bearing the risk of an uncertain outcome.”
On a possible new fee structure
“The industry should evolve to a model based on a low base fee, sufficient to cover costs so that an asset management firm can continue to invest during the inevitable periods when its results are poor, combined with a sliding, and capped, performance fee.”
On investor education
“Individuals must be educated about the decisions they are taking. There is an assumption that because information is freely available the investing public can take well-informed decisions… But at the moment we have a deluge of information that serves only to confuse, not enlighten. Perhaps simple, clear investor education should be our next endeavour.”
On putting clients first
“It is crystal clear to us that putting clients’ interests first is, in the long run, the best way to advance your own interests. The relationship between an investment manager and their client should be symbiotic; that it is often viewed as parasitic can be no surprise if this is the way that some firms behave.”
On a new slogan for the industry
“For too long the investment industry has seemed to take its inspiration from the slogan of the Olympic Games: Faster, Higher, Stronger. Faster trading, higher fees, a stronger position relative to its clients. We can’t help thinking that it should be targeting the exact opposite: Slower, Lower, Weaker. Slower levels of portfolio activity, lower fees, and a weaker position compared to its clients and society.”
You can read the full paper here: