By Alan Steel
Written for publication in Scotland on Sunday – Sunday 11 September

Even a cursory glance at headlines in the financial pages of our national newspapers highlights an obsession with investment charges.

Google “fund charges” and within 0.5 of a second there’s 232 million results.  Try “benefits of active management” and there’s only 4 million.  So there’s 58 times more interest in cutting investment costs than in improving net returns.

Indeed Investment Association inflow/outflow statistics confirm private investors are dumping “active” for “passive” in ever increasing numbers over the last few years.

Five years ago I attended a Pensions Seminar where an actuary recommended that, “because only 25% of active funds can outperform index trackers Trustees shouldn’t waste their time trying to spot winners.”  Now let’s for a moment assume she was accurate……..

Right now in the UK All companies sector of Unit trusts (ignoring investment trusts) there’s 240 with at least a 5 year record.  Adding in UK equity Income funds there’s another 68.  So simple arithmetic says there’s 77 funds worth finding.  Over ten years there’s 238 funds so only 60 worth tracking down.  Does that sound difficult to you?

But still “evidence based experts” claim it’s a mathematical fact you can’t beat a low cost tracker, ever.

Over in the US, Michael Mauboussin just celebrated 30 years in the investment industry.  In August he shared reflections on the 10 attributes of great investors.  Members of the jury here’s some for your consideration…..

Great investors are numerate and understand accounting.  They take time to evaluate the present value of free cash flow.  They assess how businesses makes money, compare fundamentals versus expectations and weigh up probabilities.  They minimise risk, reducing exposure to overvalued stocks unlike trackers.

They view their beliefs as hypotheses to be rigorously tested not treasures to be protected.  Like Warren Buffett they’re aware of behavioural biases.  And like him they read avidly and openly, remembering Einstein believed that “Success comes from Curiosity, Concentration, Perseverance and Self-Criticism.”

Do Index Trackers demonstrate these attributes?  You decide.   hey simply mirror an Index whether it makes sense or not.  When the Index falls 50% a tracker follows.  Ouch.

Wise men say “Only Fools Rush In” (Elvis Presley) and that you should “Buy Low and Sell High.”  Index Trackers do the opposite.   o thought process.  Presumably that’s why they’re so cheap.  Or are they?

If you bother to check the actual performance of UK Index trackers over the last 3, 5 and 10 years (Money Management, September 2016) you’ll find four biggest funds with £23 billion invested are consistently way below average.  The biggest of them over three years managed to drag behind 209 other funds out of 308 (even after all charges).  It gets worse.

Tracker supporters keep referring to low costs in their “mathematical facts,” conveniently ignoring that many of them are charging clients a 1%pa “management fee” plus platform charges of at least 0.35%pa “to ease administration” on top.  That’s how we recently came across someone who’d actually lost 16% sitting in a “cheap passive strategy” since April 2013.

So the case for the defence is this.  While I accept there are “active” funds that don’t justify their charges, particularly those simply closet tracking but charging full whack for doing sod all, there are many that do.  Well managed “actives” have been delivering superior returns consistently over the last 30 years .

“Nullius in Verba”….don’t take my word for it, check for yourself.  Or as as my grannies used to say, there’s two sides to every story.  So be aware of both…the costs and the benefits.  Then you will be in a position to truly judge for yourself.

An edited version of this article appeared in Scotland on Sunday – Sunday 11 September 2016

Alan Steel
Alan Steel is chairman of Alan Steel Asset Management
Alan Steel Asset Management is regulated by the Financial Conduct Authority.

This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.

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