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Author Archives: TEBI

  1. Three disadvantages female investors face

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    The good news is, research shows that female investors often make better investors than men. The bad news, as ROBIN POWELL explains, is that women also face some big disadvantages when it comes to saving for retirement.

     

    Human beings are not cut out for investing. Our evolutionary instincts have made us so finely attuned to immediate threats that one of the biggest dangers of all — running out of money in later life — is given nowhere near the attention it deserves.

    Sadly for women, the challenge of ensuring their long-term financial security is even bigger for them than it is for men. A recent UK government study revealed that women’s private pension pots are worth 35% less than men’s by age 55.

     

    Why is there a gender wealth gap?

    There are several reasons why this gap exists. One is the simple fact that, even today, women often earn less than men for doing the same job. The mean difference between men’s and women’s average hourly pay in the UK is 5.45% and the median is 9.71%.

    Another factor is that female investors tend to be more risk-averse than men. Although that’s not necessarily a bad thing, it definitely is if it means you have too much money in cash and not enough in equities, particularly in early adulthood.

    Then there’s the thorny issue of divorce. There is a widely held perception that, financially at least, divorce from a heterosexual marriage tends to favour women. But several studies have shown that it’s the other way round, and that men tend to emerge from divorce better off than women.

    But there’s another major reason why women have less money in retirement than men, and it’s this: there are specific chapters in women’s lives that put them at a big disadvantage compared to men when it comes to investing.

    The investment platform AJ Bell recently published a wonderfully titled paper called Financial Wobbly Bits: Uncovering women’s financial wobbles and providing a toolkit to overcome them. The research identifies three significant life events that most women go through, and which greatly contribute to the gender wealth gap.

     

    1. Children

    Although men are generally more involved in childcare these days than they used to be, the numbers show that parenting still has a far bigger impact on women’s careers than on men’s. AJ Bell’s researchers found that 92% of men who were working full time before the birth of their first child return to full-time work, whereas only 55% of women do the same. This gap widens as couples have more children, with only a quarter of women returning to full-time work after their third child, compared to 80% of men.

    For some women, of course, this will be down to personal choice. But for many, the high cost of childcare prevents them from returning to full-time work. And nor is it just women’s salaries that suffer. More than 25% of women stop contributing to their pension during parental leave, while only 8% of men do so.

     

    1. Menopause

    Menopause can be a difficult time for women, and it can impact their work and finances as well as their physical and mental health. The AJ Bell research shows that one in 20 women who have gone through the menopause stopped working as a result, while one in 25 reduced their hours.

    A fifth of women said the menopause had impacted their professional confidence, and an additional 12% said their performance had suffered.

     

    1. Caring responsibilities

    In their 50s and early 60s — a time of life when most men are still working — women are often expected to care for other family members, particularly grandchildren and elderly parents. 

    According to AJ Bell, almost half of women have had their career or finances impacted by caring responsibilities outside of parenting. For example, 15% of women gave up work, 18% cut their hours, and 7% took a lower-paid job.

     

    How can female investors redress the balance?

    What, then, can women do to overcome these disadvantages?

    The first thing is for women to be aware of them in the first place. If you have a daughter or granddaughter at the start of their adult lives, why not talk to them about their finances and the importance of investing and living within their means? You could also buy them a book to improve their financial literacy.

    Women should start investing as early as they can, and put away as much money each month as they feel able to. So think about your future self and ask the question: is there a luxury I’m spending money on today that I could sacrifice in order to secure a higher standard of living later in life?

    If you feel you deserve a pay rise, ask for one, and instead of spending the extra money you make each month, invest it for the future.

    Of course, children and family must come first. Quitting work to focus full-time on bringing up children or caring for ageing parents can be extremely rewarding. But don’t neglect your preparations for retirement in the process. The number of women living beyond the age of 100 has grown dramatically in recent decades, and so too has the cost of long-term care. You may need far more money in your later years than you think.

    Whatever stage of life you’re at, think about hiring a financial adviser. And choose one with specific expertise in the specific financial issues facing women, particularly around childcare, career breaks and divorce.

    Finally, remember that planning your financial future is ultimately down to you. Who’s going to take responsibility for it if you don’t?

     

    ABOUT THE AUTHOR

    ROBIN POWELL is the editor of The Evidence-Based Investor. He works as a journalist, author and consultant specialising in finance and investing. He is the co-author of two books, Invest Your Way to Financial Freedom and How to Fund the Life You Want, and his company Regis Media provides high-quality video content for advice firms and other financial businesses.

     

    MORE FROM ROBIN POWELL

    Why fund industry marketing is so seductive

    Are hedge funds the answer in this market environment?

    To trade stocks is a waste of time and effort

     

    JOIN THE CONVERSATION

    So what do you you think of this content? Follow Robin Powell and TEBI on social media and join the debate. We would love to hear your views. We’re on Twitter, LinkedIn, Facebook and YouTube.

     

    © The Evidence-Based Investor MMXXIII

  2. Do active fund managers add value?

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    Active strategies are still hugely popular amongst investors. Despite their popularity though, the evidence shows that very few of these actively managed funds actually manage to outperform the market average. Robin Powell talked to the University of Bristol’s PROFESSOR IAN TONKS to find out why.

     

    TRANSCRIPT

    Robin Powell: Most investors use what’s called an active fund manager. Now, that manager actively picks stocks to try to beat the market. But the evidence shows that, over the long run, very few funds actually do beat the market. One such study analysed the performance of around 500 UK funds over a period of 15 years.

    Ian Tonks: We have some relatively sophisticated benchmarks to try and identify this outperformance. What we find is that, typically, again about one per cent of these active fund managers do systematically outperform their benchmarks – but again, only in terms of their gross returns. It’s almost whatever benchmark you put up against these returns, in terms of net returns, no fund manager outperforms.

    RP: In other words, if it weren’t for fees and charges, some active funds would beat the market. But the costs simply outweigh the benefits. So why do active managers find it so hard to outperform? Well, for Professor Tonks, it’s primarily down to the fact that they’re caught between the need to pick winners on the one hand, and the need to reduce risk on the other.

    IT: That kind of trade-off between spreading the risk and also trying to spot winners and losers actually means that, often, the fund manager is constrained such that – even if they do spot the winners – they have not invested sufficiently in those winners to really generate any substantial outperformance.

    RP: The findings of Professor Tonks and his colleagues are consistent with those of many other studies of active fund performance around the world. So, I asked him, did his research inform his own personal investment strategy?

    IT: So the answer’s yes. I invest in a number of different passive funds, I take a strategic asset allocation view, I decide whether to invest in investment overseas or in the UK, and what kind of funds do I want to invest in the UK, and then my savings are essentially in passive tracker vehicles.

    RP: In summary then, it’s possible – in theory – that, if you invest in an actively-managed fund, you’ll outperform the market on a cost- and risk-adjusted basis in the long run, but it’s unlikely. Effectively, it’s a bet — and a bet you’re likely to lose.

    ALSO IN THIS SERIES

    How to stay disciplined during crashes and corrections

    Are multi-manager funds really a good idea?

    How much can you trust the investment industry?

     

    CONTENT FOR ADVICE FIRMS

    These videos are examples of the high-quality financial education content produced by Regis Media. If you work for a financial advice firm and would like to learn more about the content we provide for advisers around the world, email Robin Powell, who will be happy to help you.

     

    THE TEBI YOUTUBE CHANNEL

    Have you visited The Evidence-Based Investor’s YouTube channel lately? You’ll find a wide selection of videos on there, all about investing and personal finance. Why not subscribe and be one of the first to see our latest content?

     

    © The Evidence-Based Investor MMXXIII

     

     

  3. Hogwarts Finance: how investment wizardry is failing US retirees

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    By ROBIN POWELL

    There are very few human activities in which those with no expertise and no previous experience can outperform highly paid professionals. Investing happens to be one of them. If that sounds a little unlikely, take a look at a new academic paper called Hogwarts Finance. It’s written by a very successful and highly respected investment consultant called Richard Ennis. 

    In it he examines the investment performance of the Chief Investment Officers and consultants who manage assets for America’s largest financial institutions and pension funds. They have a huge responsibility. Between them they oversee about US$10 trillion. It’s a staggering sum. And yet, between them, these highly paid professionals have been outperformed by simple low-cost index funds since the global financial crisis of 2008-09. 

    This underperformance has averaged between one and two per cent a year. That might seem like a small amount, but, compounded over time, it makes a huge difference.

    The problem, says Ennis, is a lack of intellectual rigour in institutional fund management. “The professionals,” he writes, “are ignoring their canon. Lawyers coming before the bar are expected to know the law. Physicians, conspicuously, in my experience, attempt to adhere to the best medical science. Engineers do not improvise when designing bridges. But the people managing institutional assets behave like they attended Hogwarts School of Witchcraft and Wizardry.”

    Here are six examples Ennis gives of the way those professionals are failing in their duty to the people whose money they are supposed to be managing.

     

    1. They conflate investment strategies and asset classes

    Institutional investors, Ennis says, mistakenly treat active investment strategies as if they were distinct asset classes like stocks, bonds or cash. Legitimate asset classes, the author argues, have inherent differences and are supported by laws, regulations, and market pricing, whereas active investment strategies are short-lived, based on subjective outlooks, and depend on selection skill or luck.

     

    1. They misrepresent alternative investments 

    Ennis explains how CIOs and consultants have falsely attributed the characteristics of traditional asset classes to alternative investments like private equity, real estate, and hedge funds. They claim, for example, that alternative investments offer diversification benefits. But the evidence shows that, since 2008, they have in fact been highly correlated with the US stock market.

    1. They underestimate the cost of complex strategies

    One of the biggest drawbacks with investments like private equity or hedge funds is that they come with high fees that investment professionals often underestimate. These fees, the paper shows, act as a significant drag on institutional performance because they behave similarly to stocks and bonds and yet are many times more expensive.

     

    1. They confuse alpha with beta

    CIOs and advisors often claim to generate alpha (outperformance relative to a benchmark) when in fact they are simply riding the broader market’s beta (the return that can be attributed to the market’s overall movements). Instead of using actively managed funds, investors can capture beta far more cheaply and efficiently by using passive, or broadly passive, funds.

     

    1. They compare their performance with the wrong benchmarks

    Ennis points to a long-standing problem where CIOs and consultants avoid benchmarking their performance against simple, broad market indexes that match the risk level of the funds they manage. Instead they prefer custom benchmarks that are often opaque, overly complex, and likely biased to make their performance look better.

     

    1. They overlook expenses when reporting returns

    Finally, the author claims, some large public pension funds do not deduct all investment expenses when reporting returns, which departs from professional standards and overstates performance.

     

    In his conclusion, Richard Ennis writes: “(In my paper) I have described just a few of the failings in the design, execution, and measurement of institutional investment portfolios. Fund management is riddled with them. I estimate the resulting economic inefficiency costs beneficiaries in the US at least $100 billion a year. Why does this persist? Is it not time to put the wizard’s grimoire aside and take the investment textbook down from the shelf?”

    Sadly it’s rife in the investing industry — it has even infected the financial advice profession — and as research by psychology experts has shown, it’s frighteningly easy to manipulate the mind, and get it to believe the impossible.

    The good news is that investors can ignore such wizardry altogether and focus on what the independent, time-tested, peer-reviewed evidence tells us.

    So forget the wizardry. Invest instead in a low-cost portfolio of index funds. Focus on the long term, control your emotions during inevitable periods of market volatility, and resist the temptation to bail out or change course.

    That way you can outperform the majority of investors — and yes, that includes the professionals.

     

    If you want to learn more about Richard Ennis and his work, this recent profile of him is fascinating, while here is a list of his most recent research papers.

     

    ABOUT THE AUTHOR

    ROBIN POWELL is the editor of The Evidence-Based Investor. He works as a journalist, author and consultant specialising in finance and investing. He is the co-author of two books, Invest Your Way to Financial Freedom and How to Fund the Life You Want, and his company Regis Media provides high-quality video content for advice firms and other financial businesses.

     

    ALSO BY ROBIN POWELL

    If you found this interesting, we think you will enjoy the following content too:

    Why fund industry marketing is so seductive

    Are hedge funds the answer in this market environment?

    To trade stocks is a waste of time and effort

     

    INDEPENDENT PORTFOLIO ANALYSIS

    In conjunction with our colleagues at Finominal, TEBI now provides independent portfolio analysis for institutional investors, professional clients and eligible counterparties in the UK and the US. For a fee of £950, we will provide a thorough review of your existing portfolio and identify any issues with it. We will always suggest ways to make it cheaper, simpler and more diversified. This does not constitute regulated financial advice, and we do not offer this service to retail investors. For more information and to book a free demonstration, click here.

     

    © The Evidence-Based Investor MMXXIII

     

     

  4. Why fund industry marketing is so seductive

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    For decades, fund industry marketing was hugely successful. Fund houses would invest tens of millions of pounds every year on getting their products in front of consumers. It was awesomely lucrative, and to an extent it still is. But why is fund industry marketing so effective? As ROBIN POWELL explains in his latest article for Timeline, it’s essentially down to what psychologists call confirmation bias.

     

    For several years in the early 2000s, Rudy Kurniawan was a well-known wine collector and dealer. He specialised in rare and valuable wines, particularly Burgundy and Bordeaux, and became a multi-millionaire. Wealthy people relied on him to guide them toward the most delectable wines.

    The problem was that Kurniawan was a fraudster. He was actually selling cheap red wine with fancy-looking labels. He was found guilty on multiple charges in 2014 and sent to prison.

    So how did he manage to get away with it for so long? How did he manage to fool so many people? Even top wine connoisseurs believed his wine was exquisite.

    The reason is simple: human beings have a powerful confirmation bias. In other words, we tend to see or hear what we expect to encounter.

    When Kurniawan invited sommeliers to try his wine, he told them they were about to taste a highly sought-after vintage worth thousands of pounds a bottle. Their taste buds were primed to taste something exceptional – and so they did.

    The story of Rudy Kurniawan should serve as a cautionary tale to investors when looking for a fund to invest in. 

    READ THE FULL ARTICLE HERE

     

    ABOUT THE AUTHOR

    ROBIN POWELL is the editor of The Evidence-Based Investor. He works as a journalist, author and consultant specialising in finance and investing. He is the co-author of two books, Invest Your Way to Financial Freedom and How to Fund the Life You Want, and his company Regis Media provides high-quality video content for advice firms and other financial businesses.

     

    MORE FROM ROBIN POWELL

    Are hedge funds the answer in this market environment?

    To trade stocks is a waste of time and effort

    Self-attribution bias in active management

     

    JOIN THE CONVERSATION

    So what do you you think of this content? Follow Robin Powell and TEBI on social media and join the debate. We would love to hear your views. We’re on Twitter, LinkedIn, Facebook and YouTube.

     

    © The Evidence-Based Investor MMXXIII

     

     

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