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Brian Tora: A timely reminder

Cracks in investor confidence are appearing – and not before time. Our own market has held up remarkably well, but some of the better performing areas of the world – like China, for example – have seen a swift reversal of fortune. In a brief fortnight in the middle of August the Shanghai Composite Index shed 20 per cent – pretty much enough to qualify as a bear market.

It would be wrong to read too much into such volatility, given the nature of Chinese investors, but it does serve to remind those back home that emerging markets are not necessarily a one way ticket. The argument that these nations will lead the world out of recession has been well rehearsed, but enthusiasm had got the better of prudence in a recovery that saw some of these markets double in value.

Meanwhile, I read with interest of the effect the difficult market conditions have had on the sale of retail investment funds. According to Financial Research of Boston, the top 25 US fund management groups suffered a 21.6 per cent fall in the value of their assets in the year to last June. No surprises there, you may think, but it is which groups did best that makes the most interesting reading.

Contrast the experience of, say, Barclays Global Investors and Fidelity. These two giants of the retail investment world saw their assets under management fall by 2.7 per cent and 28.2 per cent respectively.
You might well think this the result of superior performance or a better customer relationship approach. Performance probably does come into it. The real reason for BGI’s superior retention is that their funds are primarily index-linked. Fidelity is an active manager.

This conclusion has not been arrived at based just on these two results alone. State Street – also primarily a passive investor – saw it’s invested assets fall by a mere 0.7 per cent. Vanguard, which has recently entered the UK retail market, lost 13.4 per cent of its funds – more than the other two, but far better than the experience of the active managers.

As it happens, I read that American actively managed funds outperformed their respective indices over the past 12 months on average. Given the tumultuous nature of markets during this period, it suggests that when shares are swinging around, active managers can derive a benefit. But indices are difficult to beat in the longer term. Aside from anything else, they don’t suffer dealing or administration expenses.

This is a topic I’ve addressed before and expect to return to again – probably frequently.

In 2008, when markets were more one-directional, index trackers did better than actively managed funds. But the real issue is cost. Passive investing is cheaper. The management charges on these funds are, by and large, a fraction of what is demanded by active managers.

If the regulators succeed in outlawing commission – which appears to be the agenda of the RDR – then I can see advisers flocking to low cost, passive funds.
The fund platforms have recognised this, with new charging structures being explored and ETFs and similar vehicles being considered for inclusion. What this might mean for the so-called star investment managers, heaven alone knows.

Brian Tora ( is principal of the Tora Partnership


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There is one comment at the moment, we would love to hear your opinion too.

  1. You must be joking 25th August 2009 at 3:17 pm

    Lies, Damn Lies and Statistics
    In my humble opinion, RDR will serve to increase the costs of both index trackers and ETFs as Advisers will cease to offer these as “feebies” tagged on to portfolios of active funds.

    Having said that, I would question where the writer has obtained his performance data.

    A quick search on Trustnet this afternoon, looking solely at UK All Companies, gives the following 5 year performance data:

    Best ETFs

    BGI iShares FTSE 250 – return 59.6%

    BGI iShares FTSE 100 – return 29.2%

    BGI iShares MSCI UK Index – return 17.0%

    As a contrast the UK All companies sector contains 256 funds with a 5 year history. Of these, 209 have beaten the MSCI Index ETF over the last 5 years; 127 (over half) have beaten the FTSE 100 Index ETF and 22 have beaten the FTSE 250 Index.

    Oddly enough, the “best” performing Index Tracker was 27th over the period (HSBC FTSE 250 Index).

    And who says active management doesn’t pay???

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