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Fund follies

High turnover of funds belies the long-term investment claims

There will be many savers whose hearts have skipped a beat in recent weeks as markets have gyrated back and forth and not just the unsophisticated ones either. Seasoned investors have been wincing at the very thought of losing money as shares prices have fallen across the globe this month.

Many fund managers will be pleading with their investors not to panic. After all, they continually talk about the need for investors to have patience, advocating that investing is a long-term game plan and that we should not be so fickle as to run scared at the first sign of volatility or poor performance.

It is your time in the market that makes a difference, not your time out of the market, they will say.

Yet many fund managers fail to practice what they preach. As quickly as groups launch a fund, they close one too. According to some number crunching by TCF Investments, nearly one fund has been launched and one fund closed or merged every working day over the past dozen years. The total number funds that have been launched since 1999 is 2,660 while the number of closures, including mergers, totals 2,486 over the same period. The total number of funds in existence at the end of 1999 was 2,437 and by the end of 2010 it was 2,574.

TCF argues that these facts make nonsense of performance tables because it is reasonable to assume that the funds being closed or merged “are those that have performed badly”.

It means that about half of the funds in any five-year period have been merged or closed and that means their track records have been hidden too, as they are no longer in the performance league tables.

TCF Investment chief executive David Norman suggests that anyone looking at five-year sector average performance is only looking at half the story the good half.
It is an interesting take on the high turnover of funds. But the figures also make a mockery of the fund management industry’s assertion that investing is for the long term.

Over the years, tens of thousands of investors have been seduced by stellar short-term returns and clever marketing campaigns. But as soon as performance drops off or it never materialises, funds disappear from view.

We have had style funds, focus funds, target-return funds, wireless funds and global brand funds and most have all fallen by the wayside.

One minute you will find fund group salesmen punting technology at the height of the bubble to advisers and the next minute they are busy suggesting that the US or China is where that smart money should be. Groups move from fad to fad with seemingly little regard for the investors who have put their hard-earned cash in their hands. Little wonder that sales of funds of funds have soared as advisers pass the buck to multi-managers to deliver a one-stop shop for clients. Keeping track of all the comings and goings is a full-time role in itself.

Such behaviour by fund groups hardly installs confidence, neither does their fickle attitude to closing and merging funds that failed miserably. Many groups have failed to get the basics in place before venturing on.

What many investors want is a core range of funds that are worth their salt, offer value for money and are ones they can lock away in the drawer. Sadly these are few and far between.

Paul Farrow is personal finance editor of the Telegraph Media Group


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