I’ve heard all sorts of suggestions for improving the performance of active fund managers, but here’s the strangest yet: give them a new pair of running shoes.
If you think I’m joking, I’m not. Executives at Allianz Global Investors, the asset management branch of the German insurance company Allianz SE, are touring the company’s 14 offices around the world, handing out white trainers.
It’s all part of a marketing campaign to emphasise AGI’s belief in active fund management, at a time when investors are deserting active funds in their droves and switching to low-cost index funds instead.
Bloomberg quotes Andreas Utermann, AGI’s chief executive officer, as saying: “Sneakers are just part of this brand relaunch. It’s not just the investment process that’s active, it’s the whole ethos of the firm and the way that we give advice.”
You have to hand it to Allianz. It’s trying very hard to make the case for sticking with active funds. It recently cut the management fee on some of its funds in return for a performance fee it only charges if the fund beats its benchmark.
“You only pay if we perform,” says Utermann. “Why wouldn’t that be a good deal?”
As I’ve explained before, funds with performance fees are not the no-brainer the fund industry likes you to think they are. OK, you don’t get charged if the fund trails the index, but nor do you get reimbursed the money that you would have made if you’d invested in a low-cost index fund.
After costs, active funds underperform the index most years, often by large margins, and the performance of AGI funds over the years has been little or no better than those of its peers.
Over time, the cumulative effect of that underperformance will leave a big hole in your returns. Add to that the compounded management fee (even if it is reduced), and having to pay additional performance fees when the fund does beat the market, and it all makes a for a very bad deal for consumers.
As for the running shoes, I can now say I’ve seen it all. This is how desperate active managers and their marketing departments have become.
It is, of course, a huge gimmick. It plays on the conjunction fallacy — the common assumption that doing something is better than doing nothing, and that hard work and effort inevitably lead to better outcomes.
The thing is, it’s the activity that’s the problem.
As the former fund house executive Lord Myners recently admitted, most funds perform better when the managers aren’t working at all (i.e. when they’re on holiday). Why? Because of the constant buying and selling that active managers feel they have be doing to justify their fees and bonuses and to keep their jobs. Every trade they make adds to the cost of using them, and as studies have repeatedly shown, cost is the single most effective predictor of future fund performance.
And, on the subject of cost, who’s paying for all these brand new running shoes for Allianz staff? I think you already know the answer to that.
Related articles:
The problem with performance-based fees
Does the conjunction fallacy explain our preference for active funds?
Working harder isn’t the answer the failing fund managers
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
