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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.

Where Do Human Fund Managers Beat Computers?

Written by: Dan Hyde (Deputy Personal Finance Editor of "The Daily Telegraph")

26 October 2013

Categories

Dan Hyde wrote in Telegraph Money last Saturday that a growing army of investors has ploughed £70bn into index-tracking funds mainly based on lower costs. For instance, a tracker fund might have an annual charge of 0.25% against an active fund of 1.7%: in theory, the passive will always lag the index by 0.25% but, against this, there is an imperative for the active to beat this by 1.45% just to match it – and many fail.

Mr Hyde then argues that the difference between active and passive funds is in fact “far more nuanced”, as the chances of beating the index may well be influenced by the sector and type of shares involved. There is a greater chance of active fund out-performance, he argues, in inefficient Latin American or Asian markets than in the USA. In America, 61% of active fund managers have failed to beat the average return of 73% over the last five years and, for global funds, 56% of active managers failed.  However, they achieved more success with smaller companies and emerging markets.

Let`s Hear It For The Little Guys

Written by: Jonathan Eley (Financial Times)

27 October 2013

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Jonathan Eley, in the Financial Times over last weekend, looked at the concentration of assets in the investment industry and discussed whether this was healthy for investment returns.

Over the first six months of this year, the top five UK providers attracted £20bn of assets while, across Europe, the top five accounted for half of the market by sales. Mr Eley observes that we are now in era when the margin increasingly accrues to the distributor, rather than the provider, and it is only the bigger funds that can afford to harvest assets through larger marketing budgets – “size begets size”.

However, the larger a fund becomes, the more unwieldy it becomes and unable to deliver out-performance – mainly because it takes a long time to build up desired positions with such large amounts to invest (especially in smaller, less liquid companies).  Even Warren Buffett acknowledges that the size of his fund will reduce levels of future performance.

Larger funds have become less in favour with smarter investors, who often use low-cost passive funds for the core of their portfolios and supplement them with high-conviction, actively-managed funds. Mr Eley observes that none of these more nimble funds will out-perform in all market conditions, because no fund can do that, but they are worthy of consideration within a core (passive)/satellite (active) portfolio.

Prince Charles and His Criticism of Short Term Investing

Written by: Alison Smith, Stephen Foley and Neil Collins ("Financial Times")

20 October 2013

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Last weekend`s Financial Times carried a number of references to Prince Charles`s views on short term capitalism – as expounded in his speech to the National Association of Pension Funds a few days earlier.

Neil Collins believes that short termism is a symptom rather than a cause – i.e. “too many coins are sticking to the shovels of the managers and the brokers.”  He states that running a fund is so lucrative that there are four pages of them in the weekday FT, as opposed to only a single page of the underlying stocks that the funds trade.  The Kay report recommended scrapping quarterly reports and praised Neil Woodford as a model manager (who has now resigned to run his own hedge fund). Professor Kay believes that: “The short term horizon is basically introduced by the intermediary sector.”).

Alison Smith and Neil Foley say that it has been an uncomfortable few days for short-termism.  The same time horizons seem to bedevil investors in the US, and there is currently a move against this, led by the likes of Warren Buffett and John Bogle (Vanguard).  They refer to the fact that to quantify short termism, the average duration of equity holdings is sometimes used: from 1940 to the mid-1960s, this represented about seven years in the US, though, by 2007, this had fallen to as low as seven months (currently around two years).

Paul Woolley, of the London School of Economics, defines short-termism as following trends to make money or reduce risk (“… responding to price change rather than fundamental value.”). Reasons that short-termism has risen include lower transaction costs, regulation (mark-to-market rules) and the amount of data available.  According to Michael Roberge, at Boston`s MFS Investment Management, remuneration is a key problem, as managers` pay is still based on one year performance – leading them to churn portfolios in the hope of beating their benchmarks towards year-end.

 

Transparency Will Flush Out The Closet Indexers

Written by: John Authers ("Financial Times")

6 October 2013

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In last weekend`s Financial Times, John Authers delved more deeply into the recent findings of the SCM Private report, which exposed the number of active fund managers who were still charging significant premiums for doing little more than quasi-track market indices – the practice of “closet indexing”.

Authers argued that this represented a tax on millions of investors for no economic benefit, and helped to inflate asset bubbles. Furthermore, it impeded capitalism and the efficient allocation of capital.

Just by way of a reminder, SCM Private analysed £120bn in UK funds in September 2013 and alleged that investors could have saved £1.86bn in fees had they switched to cheaper equity index funds.

The article provides a useful explanation of what academics regards as “active share” – namely if fund X invested in all the holdings of a particular index except for one share which represented 5% of that index, it would have an active share of 5%.  A passive index has no active share. The academic view is that once active share drops below 60%, it is a possible “closet indexer”.

SCM Private found that only 24% of 127 UK funds benchmarked to the FTSE All-Share index had an active share above 70%. In a US sample of funds, conversely, 65% had an active share this high.  Overall, the UK funds had an active share of 60%, compared with 75% in the US.

Authers then reminded his readers that active fund managers charge a fee which is on average three times that of trackers.  He also pointed out that 88% of funds with an active share under 50 did not match their index. He concludes that the problem lies in the way that fund managers are incentivised – i.e. through the accumulation of assets (on which a percentage fee is charged), rather than market out-performance.  “Make a big contrarian bet and you may be separated from the herd. So everyone herds into the same stocks.”

SCM private also found that, where a high active share is employed, there is a much greater chance of beating the relevant index – “the more genuinely active a fund, the more likely it was to outperform”.

 

 

Fund Holders Are Being ‘Conned’ Out Of £3bn

Written by: Richard Evans ("The Daily Telegraph")

28 September 2013

Categories

In Telegraph Money last weekend, Richard Evans examined the views of investors in connection with the pricing of some actively-managed funds and concluded that many do not trust fund managers to make better returns than the wider market. 80% of readers polled supported the suggestion that they were being “conned” into paying billions of pounds in unnecessary fees, while only 15% said they were happy to pay for active funds. The remainder said they preferred trackers.

Mr Evans cited the claim from SCM Private that 46% of actively-managed funds are actually closet trackers – i.e. broadly replicating a stock market index, but at a premium price. As a result, charges on actively-managed funds are higher than those on trackers, and investors who own closet trackers have paid £3bn in extra fees over the past five years without getting any real active management- according to SCM.

The SCM report also claimed that 88% of active funds in which the majority of the fund mirrored the relevant stock market had under-performed, largely because of high fees. Significantly, the effective annual management charge on the portion of the fund that was actively-managed amounted to 4 per cent a year if the annual management fee was stated as 1.5%.

The SCM report considered all UK funds, responsible for investing £118bn from British savers, as well as the American market – which had a much lower incidence of closet tracking. The founder of SCM Private, Gina Miller, stated: “Our analysis shows that nearly half of UK retail funds may have been misleading the public and breaching the regulator`s overriding principles that firms must conduct their business with integrity, and communicate information in a way that is clear, fair and not misleading.”

 

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