For readers outside this sceptred isle, the big financial story here in the UK this week, aside from the Budget, has been the merger of two of our biggest asset managers, Standard Life and Aberdeen.
No one likes to see people lose their jobs but, as you could imagine, I’m pretty bearish on Scottish fund management. Right now its prospects look about as bleak as North Sea oil.
For a while the industry tried to pretend that active management failure was a purely US phenomenon. But evidence from the likes of Cass Business School, S&P Dow Jones Indices and now even the Financial Conduct Authority clearly shows that our own highly paid money managers are little or no better than their colleagues on Wall Street at beating the market after costs.
We’ve not yet seen the huge outflows from active funds into low-cost passive alternatives that have occurred in the US , but the transition has certainly started and I expect the effects to be just as dramatic here as they’ve been on the other side of the pond.
Make no mistake, the whole investing industry is heading for a massive shakeout. Not just active managers but all those who’ve benefited over the years from the active gravy train — analysts, consultants, advisers and brokers — will have to re-examine their business models.
Aberdeen and Standard Life certainly fall into that category. Three of the six “dog” funds identified in recent analysis by Bestinvest of the worst-performing UK equity funds came from those two firms. Yes, investors have had the wool pulled over their eyes for years, but they’re unlikely to tolerate that sort of underperformance for very much longer.
My fellow blogger Abraham Okusanya asked his followers to suggest a new name for the new combined company. Staberdeen was his favourite, while mine was Rock and a Hard Place Investments; someone else suggested that if it were a movie it would have to be Exodus, directed by John C. Bogle.
I must admit I had a laugh as well at Merryn Somerset Webb’s coverage of the story in the FT. In it she recalled sitting next to a “very senior Standard Life executive”, since retired, at a male-dominated dinner:
“After he had made it clear he wasn’t mad for journalists, he went on to make it extra clear by suggesting that if consumers had lost any confidence in the asset management community over the past decade (they have) this was not in any way related to any failure on the part of said asset management community. It was instead the fault of the kind of journalists who get a kick out of stirring up trouble.
“We didn’t talk much more after that. He isn’t in his job any more. But I suspect that, by now, even he can see that the traditional fund management business has the kind of problems that really can’t be batted away as crazy figments of the bitter imaginations of doom-mongering journalists.”
The irony of the fund industry blaming the media for the low-esteem in which it’s held today will not be lost on regular TEBI readers. Fund industry executives have grown rich on the strength of 30 years of blanket promotion in the trade press and the weekend money sections. They can hardly complain now that I and other journalists have started to question the value (or rather the lack of it) that active management provides for consumers, and indeed the wider economy.
Investors need to be able to read financial publications and feel that they’re being told the truth. At the very least, they have to know they are not being sold to. The bulk of what they’ve read for far too long has been thinly disguised PR; at last, thankfully, they’re starting to see this hugely important industry exposed to proper investigative journalism. No wonder fund house executives are feeling uncomfortable.