Sunday, 20 April 2008

Fund managers are burning our money

As hopefully a few people recognise the title of this post is inspired by the TaxPayers Alliance blog. I was reminded of the title recently when I sat in on a pension fund meeting. One of the presentations was from The WM Company, which provides investment performance data to pension funds and others.

Anyway, the woman from WM presented the company's analysis of local authority and other pension fund performance. She highlighted a number of the characteristics of better performing local authority funds. The principal ones were that the better performers tended to be bigger, be internally-managed, have less fund managers if they were externally managed, and to change their external managers less often. (By the way when I say intenrally managed I mean the council actually employs a fund manager or fund managers on the staff. Not common these days but it still happens).

It brought home to me, yet again, what a mug's game active management is. Think about it. Reasons that big internally managed funds do better are because their costs are lower - not just economies of scale, but also less portolio turnover. Meanwhile funds that chop and change managers - seeking that precious alpha - do worse. I can't shake the view that even if - and it's a big if - active management can consistently deliver the goods, pension funds are failing to pick the right managers for the job. Yet they continue to pee millions of pounds up the wall for mean-reverting performance.

Plenty of people have put this more eloquently than I can. Here's Vanguard's John Bogle back in the 1990s:

"... RTM is a rule of life in the world of investing—in the relative returns of equity mutual funds, in the relative returns of a whole range of stock market sectors, and, over the long-term, in the absolute returns earned by common stocks as a group".

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