The Evidence-Based Investor

Tag Archive: Chris Sier

  1. Should you invest with Baillie Gifford?

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    More and more people are starting to ask me about Baillie Gifford.

    For those who don’t know, Baillie Gifford is an investment management firm based in Edinburgh with more than £200 billion under management.

    Right now it’s on a roll. According to Morningstar’s latest fund flow figures, it attracted higher net inflows in the UK last month than both Vanguard and BlackRock.

    It’s also produced very strong performance (and hence media attention) in recent months. Even in areas like US equities, where index funds typically dominate, BG American is the second strongest performer of the first half of 2020, returning more than 50%. The S&P 500 is currently down around by around 2.5% year to date.


    So what should we make of Baillie Gifford?

    Let me say this first. I’m not a fan of active money management generally, but I have great respect for Baillie Gifford.

    Research by my fellow transparency campaigner Dr Chris Sier has shown that it’s one of the most transparent asset managers when it comes to cost disclosure and the reporting of performance.

    Baillie Gifford has also had the integrity to admit that large sections of the fund industry are simple extracting value from consumers rather than adding it. Its report, Riding the Gravy Train, published 18 months ago, is essential reading for anyone interested in better investor outcomes.

    On the back of that report, I went to Edinburgh to interview one of the partners, Stuart Dunbar. What I discovered was that his views and mine had far more in common than I thought.


    But what, if anything, can we take away from the Morningstar data?

    It certainly shows us, yet again, that there’s a strong demand for active management. There always will be — especially, to use that dreadful phrase, at times like these.

    The idea that markets are any more “uncertain” today than they’ve ever been and that things will one day “return to normal” is a fallacy. That active managers do better in bear markets is also palpably false (in fact they do slightly worse than they do in bull markets), but we want to believe it’s true.

    We also want to believe, contrary to all the available evidence, that we can consistently spot winning funds in advance. We can’t — and nor can our financial adviser, the Hargreaves Lansdown research department or our favourite Sunday newspaper.

    Yet fund houses have massive marketing budgets, and there are plenty of publications looking for “stories” about short-term outperformance.

    Investors shouldn’t be impressed by these stories but they always are, and the industry knows it. As Joe Wiggins explained on his Behavioural Investment blog this week, the result is that fund managers are themselves fixated on the short term.

    “Executives at (asset managers) are incentivised to raise assets under management and therefore become focused on near-term results,” Joe explains.

    “Although underlying investors are unlikely to be well-served by such myopia, the structure of the system means that fund managers have to play a different game.

    “What is rational for the manager or business may not always be rational for the client.”


    Random noise

    Thankfully, Baillie Gifford is not in the myopic majority. It’s a genuinely long-term investment manager, and that alone will serve its clients well.

    But to see its first-half performance as a reason for investing in BG funds makes no sense whatsoever.

    For a start, six months of outperformance is random noise. All the evidence shows us that anything less than around 11 years of data tells us nothing about the likelihood of a fund outperforming in the future.

    To judge a fund manager over half a year is frankly laughable, as I’m sure Baillie Gifford would agree.


    Will its performance persist?

    The other question to ask before joining the rush to invest in an outperforming fund is this: How long do you honestly expect the winning streak to continue? Yes, having a bias towards growth and tech stocks has worked very well for BG investors in the first half of 2020. Sooner or later, though, every investment style falls out of favour.

    As the SPIVA data on the persistence of outperformance shows, funds in the top-quartile rarely stay there for long.

    Remember, too, that almost by definition, a proper, high-conviction active manager like Baillie Gifford will inevitably underperform the market from time to time. Sometimes they will lag the index very substantially. Most active investors simply don’t have the stomach for it.


    All down to probabilities

    Ultimately, it’s all down to probabilities. Of course, some BG funds may well be in that 1% or so that outperform the index on a cost- and risk-adjusted basis over the very long term. But which ones? Nobody knows. The odds of getting it right are heavily stacked against you.

    What’s more, you won’t know if you’ve made the right decision for another 20 years, or whatever your investment horizon is.

    Will journalists still be waxing lyrical about Baillie Gifford in 2040? They might. But a simple Google search will show you that very few, if any, of the funds loved by the media at the turn of the Millennium are still considered stars today.


    If you do invest

    Two final snippets of advice if you do decide to invest with Baillie Gifford.

    First, only commit a small proportion of your portfolio. As Jack Bogle used to say, keep your serious money separate from your “funny money”. To have 5% invested with an active manager isn’t going to cause you too much damage.

    Secondly, stick with it. Don’t make the same mistake that most people do and invest after a period of strong performance and bail out after a period of poor performance. That’s a surefire way of achieving low returns.

    I, meanwhile, am sticking with low-cost index funds. Let’s compare notes in 20 years’ time.


    Here are some recent articles you may have missed:

    How to protect your credit score from COVID

    For long-term investors, stocks are the only option

    Investors’ need for a narrative

    Three ways to spot a bubble

    Is there such a thing as a “normal” stock market?

    The smarter you try to be, the worse you do

    You don’t need to know the future to invest successfully


    Picture: Peter Cordes via Unsplash


    © The Evidence-Based Investor MMXX



  2. Even trained statisticians struggle to calculate investment costs

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    When you buy something, you expect to know how much it costs. But when pay to have your money managed, it can be extremely hard to work it out.

    Chris Sier has a doctorate in statistics and has spent many years researching the subject. But as he explains in this video, even he struggles to work out how much some investors are paying.



    This video was produced for AES International, an evidence-based financial planning firm, based in Dubai and serving English-speaking expats around the world.
    If you would like us to put you in touch with an evidence-based firm in your area, get in touch and we will try to help you.
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    Video transcript:

    As an investor, you need to know how much you’re paying.

    Unfortunately, fund management companies around the world have traditionally made it very hard to work it out. Statistician Chris Sier decided to look into the cost of investing when he moved from a job as a police officer to work in asset management in London. Despite having less responsibility in his new post, his salary almost doubled overnight.

    “My question was: where does the money come from? Where does money evolve? And how does it fuel everything that we see outside the window here — which you can’t see here obviously… but all of the buildings and all the companies and all the people are funded somehow, and it got me thinking about where the money came from. And then, I reached the conclusion that it came from the consumer, and the consumer pays for everything. And that’s been my journey since then: it’s figuring out how much the consumer pays.”

    Something that surprised Dr. Sier, as he started to investigate further, was quite how many layers of intermediation there are involved in asset management. Of course, every layer adds to the cost.

    Dr. Sier says: “So there are a whole bunch of things that the consumer won’t recognise. They recognise a fund manager, or maybe if they don’t recognise the fund manager, they’ll recognise the platform or the distributor. Or in the pension fund world, they’ll recognise their pension fund provider. But they probably don’t know about things like custodians, brokers, transfer agents and all of these many, many intermediaries that exist in the process — that actually, every time the money touches them and passes through their hands, they get paid for. Now, I’m not saying that that’s wrong — for people to get paid — but what I am saying is the industry could be so much more efficient. Every layer of intermediation that sits in that journey takes some money.”

    Something that many investors don’t understand is how much of their returns are eaten up by the cost of trading. The more the fund manager trades, the more you pay.

    Dr. Sier says: “My father, as a fund manager, always used to say: you can bleed performance by over trading. So he was very cautious and never really traded. He’d buy and he’d hold and he’d keep… and he would be very, very cautious about the things he bought. That was his model. But others don’t have that point of view: they tend to trade, and they trade upon the volatility of the price. There’s an opportunity: “we should sell it and make some money,” or “we should buy because it’s cheap and then we should sell it later on.” Those are two very different approaches. And you need to be aware that when you buy manager A versus manager B, that one is not going to have lots of trading costs… and one might well have, because that’s their model.”

    Chris Sier is now working in several countries, trying to get to the bottom of how much investors pay. But it’s a painfully slow process. Until the total cost of investing becomes clear, investors are best advised to stick to low-cost funds with transparent fees and charges.


    Picture: Pixabay (via Pexels)


  3. Baillie Gifford: Investors will benefit from the fund management shakeout

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    One of the biggest barriers to sensible decision-making — not just in investing, but in every walk of life — is confirmation bias. We actively seek out, and give far more prominence than we should, to information that reinforces our existing beliefs.

    The best antidote to confirmation bias is to do the opposite — to go out of your way to talk to people who take the opposing view and genuinely try to see things as they do.

    In that spirit, I recently went to Edinburgh to meet STUART DUNBAR, Partner at the investment company Baillie Gifford. Founded in 1908, Baillie Gifford works mainly with institutional clients. It currently manages about £200 billion for clients all over the world, mainly in equities.

    Considering it’s an advocate of active money management, I have more in common with Baillie Gifford than you might imagine. For example, the firm has been highly critical of the UK asset management industry and its “gravy train” culture. It has also been singled out for praise by my Transparency Task Force colleague Chris Sier for the way that it sets out its fees and charges.

    So, leaving aside the rival merits of active and passive investing, how much common ground would Stuart Dunbar and I manage to find?


    Stuart, what would you say it is, more than anything, that distinguishes Baillie Gifford from other active fund houses?

    It’s best encapsulated in timescale probably. We run our own business on a 10- or 20- year view. That means the only way we are going be successful is if our clients are successful, and stick with us for that sort of length of time. I think we are very fortunate to be a private company with shareholders that let us operate in a stable fashion. It’s an industry which, by definition, is subject to the volatility of markets and hence revenues and so on. So, fundamentally, what makes us different is our ability to take the long view and pretty much ignore day-to-day noise.

    Of course, a long-term perspective isn’t only good for investors; it also benefits the firms that Baillie Gifford invests in, doesn’t it?

    Yes. There’s a wonderful irony in the fact that listed asset management companies, in the main, will be owned by other asset management companies who sort of push them into short-termism. We’re victims of ourselves in that regard. The real job that we should be doing as fundamental investors is to try to build businesses. We don’t invest in shares; we invest in businesses, and work with businesses to try and help them to take the long view of what they’re doing.

    If a business has an investment opportunity, they should take it, even if that uses up this year’s profits. If it’s a wise investment decision, it’ll pay off down the track. We should be very much seeking to take that sort of perspective. It’s terribly sad that we’ve actually got ourselves into a situation in which the stock market reacts to short-term news. So prices move around and company management try and manage their earnings in order to keep share prices stable.

    There’s a whole misalignment of incentives in the the background. Company management often have short-term incentives to hit short-term targets, so they don’t invest in their own business. Asset managers are short-term in their view because they anticipate that the market will react to short-termism. Clients respond to how asset managers report to them on a quarterly basis, and on it goes. And so there are so many misalignments through the food chain.

    The fundamental purpose of investing is wealth creation. You have an individual, on the one hand, saving for some long-term goal, whether retirement or something else, and you have an entrepreneur or a company, on the other, who’s trying to use that capital wisely. But it just gets lost in the chain. So our job, to a very large extent, is trying to overcome all those sort of misalignments, and that’s a really hard thing to do.

    Something else that Baillie Gifford holds dear is what you call “actual investing”. What exactly do you mean by that?

    It’s a sort of plea to get back to where we were 40 years ago. I’m conscious not to sound like a dinosaur here, but we work in an industry which was better 40 years ago than it is now. It charged less money, was less self-serving, and didn’t see the stock market as a game that has to be played every day.

    So the reason for the actual investing campaign was that we’re a bit tired of being bracketed together with this homogenous thing called active management. We don’t think that what we do bears much resemblance at all to what is now conventionally understood as active management.

    Others can judge whether it’s a sensible play on words, but we decided “actual” is a better description of what we should be doing, and by that I mean getting back to this fundamental point about wealth creation and capital deployment.

    Connected to your long-term philosophy is the fact that you tend to trade less frequently than other active fund houses. Some firms seem to equate active management with activity, but not Baillie Gifford.

    In a world that is full of noise — most of which doesn’t make any strategic difference to what’s going on in a company — most of the time the correct response to news is to do nothing. But you won’t do that if you think your job is to be smarter than the next guy and anticipate how he is going react to this news.

    It’s an enormous problem, because it creates hugely more trading than ought to exist. It runs up costs, it keeps investment banks rich. So it’s absolutely accurate to say it’s harmful to the long-term interests of clients to have all this confusion between activity and active management.

    And that’s kind of why we’ve decided to call it actual instead of active. Activity is not what we get paid for. Deployment of capital successfully is what we ought to be getting paid for. Many other asset managers, and indeed a lot of investors, seem to think that if you haven’t bought something yesterday somehow you are not doing your job.

    It’s our job to make sure the clients understand that being seen to be doing something is harmful to their interests. I mean the biggest challenge we have with servicing our clients is often that question: what have you done? The stock has doubled, why haven’t you sold it?

    To some extent you get the clients you deserve, so we try and talk in these terms to our clients even before they are our clients. How can you invest successfully by getting caught in that behavioural web? What’s that got to do with investing? You’ve just got to be open and transparent about it.

    In your view, then, what are other active managers doing wrong?

    I think we’ve become pretty obsessed with trying to outsmart the peer group. A lot of it is, “The market is going to do this so we’ll try and anticipate it first.” It’s the Keynesian beauty parade type stuff. I think pretty much everyone knows, at some philosophical level, that doesn’t make sense. That’s the zero-sum game that active managers are trying to play. They’re trying to be smarter than other active managers. Just because there’s a secondary market in stocks and shares doesn’t mean you have to try outsmart everyone in the secondary market. Just focus on the fundamental job of investing.

    But firms have got dragged very far away from that, and I think the management of a lot of asset managers have a lot to answer for here. There are good people in bad firms a lot of the time, who are obsessing on their own revenues, their own profitability. It’s in the interests of an asset management company, once they’ve gathered sufficient amount of assets to be profitable, to sort of hide in the middle of the pack, keep your clients. Typically you will keep your clients if you don’t stand out negatively; but by the same token doing that means you are not going to stand out positively either. So you get this sort of almost immediate misalignment of interests.

    Investors need to understand that, because the stock market is mostly noise, that inevitably will result in periods of underperformance versus the market. But that doesn’t matter. The industry hasn’t taken on that educational challenge, and because it hasn’t it behaves in a way to secure its own short-term fortunes, which means hiding in the middle of the pack and paying too much attention to the index.

    Your colleague Tom Coutts touched on all of these points in an article he wrote earlier this year called Riding the Gravy Train. The article was very critical of some of your peers. Why, as a firm, did Baillie Gifford decide to publish it?

    First I should say that Tom is a partner of the firm and a good friend of mine, and I absolutely agree with everything he wrote. What he was trying to get at is that our industry is almost definitely too profitable. If you go back to the FCA’s investigation into the asset management industry, it was originally triggered by what was deemed to be the continuing high margins of the industry and the idea that there might be some failure of competition going on. I find it interesting that everyone seems to have forgotten that was the starting point; no one is really talking about high margins of the industry.

    So what Tom has written about, and what we at Baillie Gifford very clearly back, is the idea that most of the value that we add (on the assumption that we as a firm add value) should accrue to the clients. So, as Tom put it, it’s not our gravy, it’s the clients’s gravy. That means charging sensible fees; it means sharing economies of scale.

    As a firm we have no internal growth targets; that is not a sensible metric for fund management companies. A sensible metric should be the delivered outcomes for clients after fees. But as we have grown by dint of attracting clients, we gain economies of scale, and so we should pass that back to the clients. We’ve actually done that a couple of times. We’ve cut our fees just because it’s the right and fair thing to do. Rather ironically, it raises eyebrows more than it generates thanks. That’s just a measure of lack of trust that exists in our industry.

    So the reason for writing Tom’s piece and for being a bit more vocal about it is to tackle this alignment of interest question, where we can only be a successful business by achieving good outcomes for clients in the long run. Tom’s suggestion, which has gained a bit of attention, is that we should move to a lower base fee or performance fee structure. I mean we are, in principle, entirely behind that; you do have to be a little bit wary because it’s easier said than done to do that in a sort of open-ended fund environment. But, of course, it’s only reasonable that we should do well when our clients do well, and that the client should keep most of the returns of their investments.

    I’m not convinced that our industry fully understands that, and I find it bizarre. How can anyone think that you can build a sustainable business, when you extract most of the value — or indeed more than all of the value — from your day-to-day activities and leave your clients with nothing? That’s why you see this huge flight to passive.

    What sort of response from your peers have you had to the gravy train paper?

    Interestingly, no one has come around to start throwing bricks at my house or anything! A number of firms have got in touch with me or colleagues to say “Well done, it’s great that you’ve come out with this. We should all be getting back to the fundamentals of what investment is all about.”

    I have discovered that there are lots of good people in this industry that I didn’t know existed, who are constrained by the professional environment from focusing on the fundamentals of investing. I actually see that as quite a good thing. The industry is not as bad as I thought it was. There are lots of good people. The challenge is, how do you get the people who run investment companies to allow those good people to thrive and to invest wisely for their clients?

    How, then, do you see the UK fund industry developing over the next ten years or so?

    I think it’s fair to say that the industry has lost the trust of its clients, and I think the industry needs to understand that long-term success depends on regaining that trust. I hope we are at the start of that process.

    I think the asset management industry will shrink and that fees will come down, and that’s a good thing. I think we’ve actually started to see a shakeout. The shakeout is taking the form of mergers and acquisitions, so it’s not as obvious as it looks, but it’s happening already. Active management will become a smaller proportion of assets, margins will fall, and hopefully we’ll do a better job. But it’s actually not in anyone’s interests for fees and margins to fall to the point where we can’t afford to do a decent job anymore.

    Do you see the Investment Association playing some sort of role in the changes you foresee?

    I think it’s a really hard job of trying to satisfy a very wide constituency, many of whom have quite different views on how to run a successful asset management company. The whole Daniel Godfrey thing was fascinating. We were disappointed by how that all played out. I do wonder whether we should have said more at the time but we didn’t. We sort of kept our counsel. It seems odd that an industry association would take a short-term view of its own success. In other words, what business can be sustainably successful if it’s not to put clients’ interests first for the long term? And that’s all Daniel Godfrey was trying to do. So we were, to say the least, raising our eyebrows quite a lot at that whole outcome. But I don’t want to be over-critical of the Investment Association. We are in a pretty dysfunctional industry and they represent the dysfunction as well as the good bits. It’s a pretty difficult job.



  4. Does asset management add value or subtract it?

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    In discussions about post-Brexit Britain, the City of London understandably looms large. Financial services is one of our biggest exports. Asset management alone accounts for 6% of exports over the past ten years.

    But how much value does the financial sector, and asset management specifically, actually add?

    On the face if it, the value appears to be substantial. According to PwC, the financial sector employs 3.4% of the UK workforce, generating 6.6% of economic output and 10.9% of total Government tax receipts.

    But UCL professor Mariana Mazzucato says we are missing the bigger picture. In her latest book, The Value of Everything, she explains how the difference between value creation and extraction has become increasingly blurred. This blurriness, she argues, allows certain actors in the economy to portray themselves as value creators, while in reality they just move existing value around, or even destroy it.

    By charging high and opaque fees, Mazzucato argues, asset managers extract more value than they add. Worse still, she claims, they destroy value by encouraging excessive pay in the corporate sector and by prioritising short-term gains over to long-term investment.

    Paul Woolley from the LSE, made a similar point in a recent article in the FT. The majority of asset managers, he wrote, are following strategies that destabilise asset prices and promote short-termism, (which) not only undermines the shift toward sustainability but does untold damage to the macroeconomy.”

    Thankfully, it’s no longer just academics who are debating this subject. In a recent paper called Riding the Gravy Train, Tom Coutts, a partner at the Edinburgh-based fund manager Baillie Gifford, wrote that “the industry itself creates little of value. It is a facilitator, a lubricant for the economy…Those of us who work within it should be humble about the role we play.”

    Another dissenting voice is Charles Payne, a former director of Fidelity. Interviewed for my blog, The Evidence-Based Investor, he remarked: “We seem to have forgotten that (we) are there to provide services to the rest of the economy, not be the economy.

    “If you live your life in the financial echo chamber then what you are charging doesn’t appear excessive compared to other parts of the financial industry; but when viewed from the perspective of the rest of the economy, sustained margin pressure is inevitable.”

    It’s hard to disagree with Payne’s contention that profits will be squeezed. In its report on competition in asset management in June 2017, the FCA stated that average annual profits were 36% — around three times the average for the rest of the UK economy.

    There will undoubtedly by job losses. UK asset managers currently employ about 38,000 people; my guess is that the number will be cut by a third a more over the next few years. Salaries and bonuses will also fall, and not before time.

    In a recent interview for TEBI, the statistician and transparency campaigner Chris Sier recalled how his income shot up when he left the police to work in asset management.

    “As a police officer,” he said, “you’re dealing with people’s lives, and seeing some terrible things, and you have to bear the emotional burden of those. Then I came to the City, and I had no line responsibility and was just fiddling with numbers, and my salary nearly doubled overnight.”

    For Sier, there is a direct correlation between costs and poor investment returns, and it’s time the industry took responsibility for “the significant economic impact that a poor performing pension environment has on the UK economy”.

    Ultimately, industries that don’t provide genuine value for money will get found out. For asset management, the great unraveling is only just beginning.