I have long maintained that we possess one of the healthiest active fund management industries in the world. An industry that continues to look after our investments and pensions with great aplomb and represents the very best that Britain and the City has to offer.
Indeed, we should all (advisers, investors and managers) rejoice at the recent news that funds (both active and passive) under management industry-wide now stand at a record £989bn. This is despite continued outflows in the aftermath of the Brexit vote.
A vibrant funds industry is good for us all – whether we are investors, financial advisers, fund managers or a combination of them all. So cheers all round. We should be mighty proud of our Aberdeens, Jupiters, M&Gs (temporary performance issues notwithstanding) and Standard Lifes. Great British brands.
Yet no industry, however successful it may feel, is immune from change. It needs to adapt continually to an ever-changing world, driven by continued technological advancements and consumers’ desire for greater value for money.
The funds industry must start showing us that it is not just batting for itself (and the health of its bottom line) but for all partiesBy way of example, newspaper publishers are in the middle of a revolution – I fear for my job every day – as are supermarkets.
Financial advisers, as you well know, have undergone theirs thanks to the Retail Distribution Review. Retail fund management should be no exception. It has to change with the times.
There is no doubt that in the low interest rate, low investment return world that we now find ourselves in, the fund management industry has to cut its cloth accordingly – the actively managed core of it in particular.
Active fund management has to demonstrate more than ever that it deserves the generous cut of the cake it takes from our Isas and pensions (or our clients’ Isas and pensions) year in and year out – even though on occasion it fails to perform.
That is, it must start showing us that it is not just batting for itself (and the health of its bottom line) but for all parties – investors, advisers and investment platform providers.
No one can deny the phenomenal rise in the popularity of low-cost passive investments among both advisers and investors – be they conventional tracker funds or exchange-traded funds.
In fact, the same Investment Management Association statistics that confirmed industry assets at £989bn also revealed that tracker funds now account for more than 12 per cent of that pot. Fourteen months ago, they accounted for 10.5 per cent of all fund assets.
Passive investing is here to stay and grow – and it has an army of passionate supporters. It also has some compulsive arguments that it can put across to convince investors of its merits – low charges, the failure of many active fund managers to outperform, and active fund management greed.
Passive investing is here to stay and grow – and it has an army of passionate supportersYet it is not a one-way battle. Active fund management has a lot going for it – but it must adapt.
By adapt, that means not just giving investors a better deal in terms of charges, but also clearer information on the value of active fund management.
In recent weeks, I’ve spoken to two individuals who are both advocates of active fund management, Baillie Gifford’s Charles Plowden and Daniel Godfrey, former head of the Investment Management Association. They agree that more needs to be done to show that active fund management can be a force for good.
Mr Plowden, senior partner at Baillie Gifford, is convinced that fund managers with high active share, low portfolio turnover, long-term investment horizons and a commitment to engage with company management “are more likely to outperform indices after fees”.
As a result, Baillie Gifford now quotes an “active share figure” for each fund it runs, giving investors a clear indication of how different the portfolio is from the benchmark it is aiming to beat.
On The Monks Investment Trust, for example, the figure is 93 per cent. In other words, there is only a 7 per cent correlation between the stocks Monks holds and those that comprise the FTSE World Index. Monks is a proper active fund, not a quasi-tracker charging premium active charges.
More groups should provide such information as a matter of routine, in so doing demonstrating to the outside world that they really are fully fledged active managers.
Mr Godfrey is currently furiously working away on the launch next year of an investor-friendly actively managed investment trust. There will be no bonuses paid to executives and the aim will be to outperform on a seven-year basis. Short-termism will not form part of the jigsaw.
The emphasis will very much be on the long term and investing in sustainable companies, which in turn are investing in the future. Mr Godfrey is confident that such a trust could be a great advertisement for everything that is good about active fund management.
I wish him well. We need active fund management to continue flourishing.
Jeff Prestridge is personal finance editor of the Mail on Sunday
