What The Financial Journalists Say
It is simply not possible to keep track of the many comments and insights provided by the media in relation to investment planning.
This is where we come in.
The aim of this section is to put together an abridged commentary which summarises relevant articles written by highly-regarded financial journalists to support and inform your independent decision-making. We do the research and keep the articles current and updated for your future reference.
In view of the volume of information available, we have split this editorial comment into 5 easily accessible sections – namely:-
(1) Index-tracking vs. Actively-Managed Funds.
(2) The Cost of Advice/Commission/Management Fees/Total Expense Ratios.
(3) Exchange Traded Funds
(4) Assets and Asset Allocation/Re-balancing/Financial D.I.Y.
(5) General Background Information.
The recurring theme that you will identify is the importance of investment charges in achieving optimal returns for your money.
Europeans Consent To Investment Costs Rip-Off
Written by: John Authers ("Financial Times")
19 May 2013
Categories – Index Tracking
John Authers wrote in last weekend`s Financial Times that Americans now have a better deal from their investment managers than Europeans, as managers charge more in Europe and are less transparent with their costs.
Americans have learnt two key lessons from the past two decades. First, chasing past strong performers is a mug`s game. Second, low costs are vital to overall returns, and managers who have maintained low costs in the past tend to maintain that culture in the future. This has led to a change of behaviour in the US.
In the 1990s, the 32.5% of funds carrying the Morningstar research agency`s highest four- and five-star ratings accounted for more than 80% of the money that gushed into stock markets in that period. Performance-chasing is natural, but usually self-defeating. Top performers have usually done well by making a specific bet, or benefiting from the cycle, which will correct itself.
Americans have learnt from the great equity boom and now seek out the cheapest funds. Equity funds held by US investors now charge an average of 0.64% p.a., down from 0.93% p.a. a decade earlier. This makes a big difference in an environment of low returns. The vogue for passive index mutual funds and ETFs with relatively low costs is the main driver – these vehicles holding 34% of all assets (up from 18% a decade ago).
There is no corresponding trend to speak of in Europe. Barely 10% of European assets are managed for less than 0.5% p.a.; moreover, in excess of 60% of assets are managed at a cost of 1% p.a. or more.
European fund managers, led by bancassurers on the continent and commission-charging brokers in the UK still offer a bad deal. Sadly, consumers do not know enough to look for these costs and punish those that charge excessively.
“DIY investors could claim for mis-selling if given `accidental` advice on financial products”
Written by: Simon Bain (The Herald Scotland)
27 April 2013
Categories – Background Information
Simon Bain writes that the new Financial Conduct Authority (FCA) has warned the industry that do-it-yourself investors could still have a claim for product mis-selling in certain circumstances.
The FCA says that services which claim to offer no advice, but subtly promote views or recommendations, will come under full advice regulation. “If the customer comes away thinking they have a personal recommendation from the person they have spoken to, it was probably advice” said Sarah Bailey at the FCA.
According to Bain, websites that list favoured funds or products under the guise of research material could also fall foul of the regulator. For investors, there is emerging a new breed of websites that offer guidance through questionnaires, decision trees and DIY risk profiling, with no adviser involved.
The FCA is to review the whole area as one of its early challenges.
“Beware, Charges Can Wipe Out Your Gains”
Written by: Terry Smith ("Financial Times")
28 April 2013
Categories – Index Tracking
In Part 5 of his excellent series in the FT Weekend, Terry Smith focussed upon the costs associated with investment. He makes the point that, even if you run a concentrated portfolio of quality shares, your returns will be constrained if you fail to control costs; many investors are unaware of how much they are being charged for their investment activity.
Financial advisers and wealth managers typically charge fees of 0.5-1.0% per cent on the value of the portfolio, and will then use an investment platform to hold individual funds or shares, which might cost another 0.25% per cent a year.
If the investments are held in mutual funds (unit trusts, OEICs, etc.), there will be an annual management charge of 0.75-1.5% per cent. In addition, the funds charge certain expenses to the fund: custody, administration, legal and marketing expenses – all of which equate to what used to be known as the Total Expenses Ratio (now known as the Ongoing Charges Figure). This is typically 1.0-1.75 per cent but, once platform and advice costs are added in, the running total is generally between 1.75 and 3 per cent.
Even that isn`t it. There is also the hidden cost of dealing within the fund. When a fund manager or an investor deals in stocks, he or she pays commissions, stamp duty at 0.5 per cent.
Data published in an FSA study suggested that the average UK fund manager turned over about four fifths of a portfolio each year. Apart from the questions this raises about the lack of conviction and hyperactivity, it would suggest that additional undisclosed costs of up to 1.4 per cent are being incurred each year on top of the “total” expense ratio.
Terry Smith remarks that these costs are in stark contrast to the income available from bonds and equities. The yield on the FTSE 100 is 3.8 per cent, on the S&P 500 it is 2.1 per cent and 10 year government bonds in the UK and US yield significantly under 2 per cent. In other words, more than 100 per cent of the expected income on portfolios is being absorbed by charges.
This is disguised by the fact that almost all income funds apply such charges to the capital value of the fund, and not as a deduction from income.
According to John Bogle, the founder of Vanguard, during the 81 years to 2007, reinvested dividend income accounted for approximately 95 per cent of the compound long-term return earned by the companies in the S&P 500. No one can afford to throw away the income from their portfolio on charges.
How do you avoid or reduce charges? - one way is to cut out as many of the layers of intermediation as you can between you and the actual stocks which you own. The other method is to buy an index fund, which just tracks an index.
Given that the average active fund manager under-performs the benchmark index anyway, why would you pay more?
High Costs Leave Managed Funds Without A Defence
Written by: John Authers ("Financial Times")
7 April 2013
Categories – Index Tracking
John Authers wrote in last weekend`s Financial Times that traditional actively managed mutual funds are obsolete and it was futile to defend the indefensible. Yet attempts to point out the blatant superiority of newer passive investment products provoke furious defences from brokers.
Authers claims that the arguments of intermediaries are so threadbare that they can only be motivated by a desire to keep the commissions coming. But they are a formidable obstacle to needed change and this matters.
His main concern is that, following a strong rally, the five year returns of shares may look very good come the fifth anniversary of Lehman by September 2013 and this will make it easier to camouflage excessive costs – and to avert the deep shake-up that the fund management industry needs.
He characterises the active fund managers` model as an attempt to beat market indices with a portfolio of about 100 stocks. Such diversification makes it hard to beat the market. And while many managers are smart enough to beat the market, they cannot do so and at the same time pay themselves decently.
Authers goes on to refer to a recent survey by the London investment consultancy, Style Research, examining how 425 global equity funds, benchmarked against the MSCI World Index, performed last year. Without costs, 59% of them beat the index. Once costs to investors were included, only 31% beat the index (i.e. 28% charged too much to allow clients also to beat the index).
He states that the best answer yet devised to reduce costs is for brokers to offer index funds but, as these do not pay commission, “this spurs brokers` ire”. The arguments of the brokers are:
- First, active managers can take evasive action in a market dive – specious, as active managers under-perform consistently throughout bull and bear markets. According to Morningstar over the past 5 years, 61% of balanced funds and 67% of US equity funds failed to match their index. Moreover, they are paid to pick stocks, not time the market.
- Second, index funds are guaranteed to lose to the index, thanks to their costs – true, but again specious. The odds are they will perform better than their active counterparts, as well as enjoy economies of scale.
- Third, choosing index funds entails ignoring active managers who consistently outperform, but this small band may be the exactly the ones to avoid as history shows that persistent out-performance attracts inflows, which increases costs and makes it harder to outperform.
John Authers concludes by saying that the current modus operandi of active managers burdens investors with too many costs and this has to change.
Call To Shake Up Disclosure Of Fund Fees
Written by: Jonathan Eley ("Financial Times")
7 April 2013
Categories – Cost
Jonathan Eley reports in the F T Weekend that Daniel Godfrey, the CEO of the Investment Management Association (IMA) has proposed a new methodology for stating fund charges that could help resolve the arguments over transparency and alleged overcharging. The proposal revolves around the comprehensive disclosure of costs incurred during a fund`s financial year.
Mr Godfrey accepted that this would only show the historic costs; it would also not include charges levied by platforms, entry or exit costs and it would not be personalised to an investor`s holding period. However, it would address one of the main criticisms of the current disclosure regime – namely that Total Expense Ratios (TERs) do not include expenses such as dealing commissions, performance fees, stamp duty or foreign exchange costs.
Gina Miller, a founding partner of SCM Private, said the proposals represented significant progress. “This is good. He (Godfrey) is challenging the industry to resolve this and move forward.”
Godfrey said he would be looking to establish a stakeholder group towards the end of May 2013 and to secure agreement on firm proposals by the end of October. Full implementation would probably take until the end of 2014.