We believe that the crisis is over in Europe and that the direction of travel from here is definitely for an improvement. — Fund Manager A
If I have this right, in the autumn we will see an upturn in earnings, sterling weaken, and gilts weaken. — Fund Manager B
Which of these fund managers would you rather invest with? The manager who speaks for his employer/boss/investment committee/CIO or the manager who speaks for himself?
I don’t mean to suggest that the decision over which manager you should hand over your hard-earned savings to should be made on the back of whether or not they use the word “we”, but I do think that it is worth considering. After all, what are the advantages of active management over buying an index tracker? I can think of several theoretical advantages:
Expertise
Within the remit of their sector or speciality, a fund manager should have superior knowledge and expertise to average punters who, collectively, comprise the index.
Differentiation
The ability to either load up or lighten up on one asset or another as a tactical ploy enables the fund to beat the index.
Stability
The volatility of the index is too much for many investors. An actively managed fund provides the manager with the tools to mitigate this volatility by, for example, carrying cash, bonds, gold, or even just buying more utilities and fewer miners.
To me it seems that theoretical advantage 1 is diminished once a fund manager is a front for somebody else, whether that is an investment committee, a house decision, or a CIO (chief investment officer).
Managers who can consistently outperform an index, after charges, are very rare and, by definition, contrarian: by going against the consensus they can buy cheaper shares (cheaper because they are unpopular), which gives them the ticket to outperformance if the companies perform well and the shares get re-evaluated accordingly. You cannot outperform by buying shares in companies that most people already agree are the best in the business.
So, why would you pay fund management charges, if the manager does not make the decisions himself, but is just a mouthpiece for a hidden committee or shadowy house decision? Once you have the investment house or an investment committee calling the shots, then you have a group decision and a group decision is, by definition, just another consensus. In effect, it is just a mini index with active management charges on top.
When the Queen uses the first person plural she speaks for herself; fund managers don’t. If you want to pay for active management, then why would you not invest your time to identify somebody that you trust and then back them fully? If you want an average result and freedom from responsibility for choosing the right fund manager, and there is nothing whatsoever wrong with that, then simply buy an index tracker and save yourself the money and aggravation. But I would be wary of paying for fund managers who do not speak for themselves.
Disclosure: I currently hold no actively managed funds and no index trackers. Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.
