The reputation of British journalism may have taken a knock in recent years, but it’s a profession I’m proud to be part of. I don’t of course condone phone hacking or gross invasion of privacy but, on balance, I still think journalism is a force for good.
That said, I occasionally read an article that makes me squirm with embarrassment, the latest example being a comment piece by Jeff Prestridge in FT Adviser, entitled It pays to be active.
Jeff is personal finance editor of the Mail on Sunday, and I agree with much of what he says. For example he recently expressed concern that the Financial Conduct Authority is in danger of becoming a puppet for the Treasury, that it’s too soft on the City and that it needs more consumer champions on its board. He’s right on all three.
But I couldn’t disagree more with his views on the retail fund sector. It’s an industry, he says, of which we can be “really proud.. an example of an industry that has put the great in Great Britain”.
He goes on: “Of course, (its) success has made scores of its most impressive investment fund managers and executives seriously rich along the way.
“Indeed, many of them live in upmarket Kensington, whose gold-paved streets I tread every day on my way to work (they occasionally greet me with a royal wave before revving up their Porsche Cayenne and dashing off to work in a plume of exhaust fumes).
“Providers of certain investment platforms have also prospered – and well done I say (not an ounce of envy in me).”
Jeff is not the only journalist in the fund management fan club. There is, in fact, a symbiotic relationship between the fund industry and the financial media. The industry needs the media to talk about its products, to help it flog its stuff. The media needs fund management for its advertising revenue and, perhaps even more importantly, for something to write about; after all, recommending every week that readers simply buy and hold a widely diversified portfolio of low-cost index funds is not a great way to sell newspapers.
In his article, Jeff goes on to have a dig at what he calls the “brickbat hurlers” who take a different line to his own on the value of active fund management. One of those is clearly me, because he then includes a quote from this blog, which he paraphrases as follows: “In a nutshell, index-tracking funds rule and active funds are passé.”
As regular TEBI readers know, that actually isn’t quite my view. It’s not really about active versus passive; ultimately it’s all about cost.
What the industry doesn’t want you to know — and something that many journalists either don’t understand or prefer not to explain — is that the long-term impact of compounded fees and charges on people’s investment returns is staggeringly huge.
The investment author Lars Kroijer calculates that, for a typical investor, the cost difference between investing in active funds over 40 years, and using index funds instead, is the equivalent of seven Porsche cars. Most investors will never drive a Porsche but, as Jeff says, it appears to be the car of choice for those who manage their money.
Like Jeff, I’m not envious. Indeed I wouldn’t begrudge a fund manager earning a fortune if they genuinely provided significant value for consumers. Alas, all the evidence shows they don’t. A comprehensive study of UK fund managers by The Pensions Institute at Cass Business School concluded that the vast majority of managers were “genuinely unskilled”. Although the researchers acknowledged that there is a very small number of managers who do beat the market consistently, even those managers “extract the whole of this superior performance for themselves via their fees, leaving nothing for investors”.
Nor is performance improving; in fact, the data shows it’s getting worse. Recent reports by Morningstar and S&P Dow Jones Indices showed that only a small fraction of funds outperform over a ten-year period. A particularly alarming finding of the latest SPIVA study was that 55% of funds available to UK investors ten years ago performed so poorly that they have since closed down or been merged with other funds.
Unfortunately we very rarely read about these studies in papers like the Mail on Sunday — or, for that matter, in FT Adviser.
As I said at the outset, I believe in journalism. I believe in its potential to unearth the truth and to act as a catalyst for positive change. Journalists have an important part to play in highlighting the need for greater transparency and in educating investors — in explaining to people how the industry really works and how the costs of financial intermediation can seriously erode their savings over time.
We need journalists to be part of the solution to all that’s wrong with the investing industry, not part of the problem.