Jeff Prestridge 

Time for the tide to turn

Jeff Prestridge

Jeff Prestridge

Like all industries do from time to time, fund management is undergoing a quiet revolution.

Although there is no associated industrial unrest – no Arthur Scargill or Bob Crow to rally the workers – there is a seismic shift taking place. Out with the old and in with the new.

Active fund management, once the heartbeat of the retail investment industry, is slowly dying on its feet. It is being replaced by low-cost passive funds run by computers.

Individuality is being replaced by robots. The Vanguards and the BlackRocks are taking over the investment asylum.

The evidence is overwhelming. Financial advisers I have known for years are shunning active investment management in droves – in favour of cost-effective exchange-traded funds or index trackers.

They are no longer prepared to gamble on a City individual beating the index. They want more certainty – and they want no comeback from an inquisitive City regulator. Compliance is making them passive.

Of course, there are exceptions. For example, the meticulous Richard Jennings of financial adviser JNJ Financial Management and author of 31 Things Which Will Help Boost Your Ability to Pick Great Investment Funds is an ardent active fund backer.

But Mr Jennings is not the norm.

Analysis of the funds data accumulated by the Investment Association reveals the rise of the index trackers. In 2008, when financial markets were mired in crisis, tracker funds accounted for £22.5bn of assets, some 6 per cent of total funds under management.

The latest figures indicate that this percentage has now risen to close to 14 per cent with tracker assets surpassing £147bn. In February, tracker funds accounted for more than a third of total net retail fund sales. The tide has turned as dramatically as it does at Brean beaches in Somerset and there is no turning back.

The demand for exchange-traded funds has also exploded.

Nothing suggests the momentum behind the popularity of  the tracker fund and the low-cost exchange-traded fund can be stopped in its tracks.

Even the reporting of the funds management industry is changing with certain newspapers – Financial Times in particular – taking a particularly hostile position on active management.

This is absolutely right when swathes of it are underperforming, not outperforming – although it must be said there are still plenty of wonderful examples out there of quality active management. The world of fund management is not as black and white as some paint it.

The ongoing probe into the asset management industry by the Financial Conduct Authority will also put more spotlight on active management and in particular the costs (charges and transaction fees) that are attributed to funds.

Greater transparency – an inevitability even accepted by industry grandees that control the Investment Association – will result in more investors opting for passive over active.

It will also push some investment managers out of business and into the hands of rivals. Fund consolidation, long overdue, may ensue – although I have been saying that for Brean beach donkey’s years.

Comments