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.
Individuality is being replaced by robotsThe 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.
Is there anything that active fund managers can do to protect their endangered territory?
A more consumer-oriented Investment Association, prepared to wave the flag for good active management, would be a start. The organisation gets more insular by the day. Inward rather than outward looking. Have a look at its website. It is about as welcoming as a knock on your front door from a bailiff.
Maybe it should take a leaf out of the book of its fellow trade body, the Association of Investment Companies. Not with an ‘its’ ('it' standing for investment trust) style advertising campaign that did not work for the AITC (precursor to the AIC) in the late 1990s, but by being brave enough on occasion to highlight the virtues of good active fund management.
The AIC’s recent decision to launch a ‘dividend hero’ logo for investment trusts that have delivered investors 20 or more years of consistent dividend growth is such a move – and a smart one at that.
It is a badge that can be proudly worn by 20 investment trusts (the likes of City of London, Bankers and Alliance). The investment vehicles are in most cases low cost, shareholder friendly and have outperformed UK index trackers. They are as appropriate for investors as any tracker or ETF. Indeed, more suitable.
We need more of this kind of “up and at ’em” approach from the representatives of the active funds industry. Sadly, I do not think they are up to the task.
The trouble is that the funds industry has long lost contact with investors in favour of pandering to the might of the investment platforms. As a result, it has forgotten the virtue of listening to customers.
Businesses ignore customers at their peril. The revolution rolls on.
Jeff Prestridge is personal finance editor of the Mail on Sunday
