Wednesday, 9 June 2010

Rant alert! Fund managers vs unions

A few years ago, when I was still working at Congress House, I had a lunch (not an expensive one I should add) with a fund manager. I actually quite enjoyed talking with someone with a very different perspective on some of the things that I bang on about. But one topic of conversation really grated, and it has stuck with me to this day - BA.

What irritated me was the fund manager's assertion that BA was overmanned and its staff overpaid. It's an assertion that gets repeated by asset managers in a lot of the coverage of the current strike. Now I don't pretent to know the ins and outs of the airline industry, or how BA compares to other airlines. But I am sure that BA staff deliver a real, tangible service. The contrast with fund management could not be more obvious. Good, I'm glad you agree. But let's to be clear on a few specifics.

If you remove BA staff, the airline will not operate, the planes won't fly and no-one will serve you a delicious (sick) in-flight meal. In fund management, you could just use a computer programme and get broadly the same result, this is after all the index-tracking business in a nutshell. Secondly, the service that BA customers receive is provided by the BA staff. The pilots fly you, the ground crew make sure the plane can fly, the cabin crew look after you during the flight. In fund management the service - the returns - is ultimately provided by someone else, the people working in the companies whose shares you hold via the manager.

It never ceases to amaze me how people seem to have this implicit view that fund managers generate returns. Actually what they do is select coupons (they don't invest money 'in' companies), and week in week out many of them are paid very highly for doing this worse than a computer programme could.

This shouldn't surprise us either. Effectively employing fund managers is like paying someone to go on Deal Or No Deal and choose the boxes for you. The future is as unknowable as the contents of Noel's boxes, and the historic results of active asset managers demonstrate this rather well. Pension funds and other asset owners might - as Paul Woolley suggests - be better off doing it all themselves, as they used to for much lower costs.

I'm sure a lot of people won't sympathise with the BA strikers, I do. But at least next time you read some fund manager telling you that BA needs to cut its costs remember that part of your pension is being needlessly shovelled their wallet. People need airlines to undertake air travel, professional fund management on the other hand is arguably an entirely unnecessary industry.


John B said...

I think I mostly agree with this piece.

OTOH, isn't part of your argument on this blog that if the FS sector worked properly, then fund managers would seriously exercise the ownership responsibilities associated with their stakes in companies - in which case, they'd be adding value by overseeing and checking management's decisions, in the same way that the owner/owners of a privately held company can add value despite not being executive employees?

I don't think that most of them do at the moment, most of the time - but it seems a bit doctrinaire to suggest that they inherently can't...

John Gray said...

great post Tom!

yours in struggle:)

W said...

I don't have any sympathy for the unions. Just look at their stand over the Third Runway at Heathrow.

Never mind that Heathrow is already noise hell for residents. Schools lessons are intertupted by passing aircraft. Is this any way to live?

I am not too far from London City Airport. I was never bothered by aircraft noise, until the airport expanded flights and started using larger noisier jet planes.

Yet we are told all this expansion is good for business. This is funny as with expansion there are new routes are to places like Ibiza and Majorca. Are these business destinations?

The injustice is that not a penny in air fare is paid to local community - I would like to see a fund so that people can move out of the area.

Newham Council supported expansion of London City Airport on the basis of jobs. Yet local residents found that many of the promise of previous jobs for expansion where never delivered. Old archive documents show that the airport had projected some 10,000 jobs for local people, but this figure is barely 1,800 today.

The airport takes credit for jobs like the airport policing, which is paid for by London taxpayers!

In reality, the airline industry receives a lot of subsidy. There is no fuel tax paid, compare that companies that holiday coach tours who have to pay fuel duty. Free Policing. The aircraft e.g. airbus are subsidized by the EU. No VAT on flight tickets (but they can claim back VAT - no other industry can do this).

London City Airport is registered in an off-shore company... so you have no idea if they are paying full UK tax....

Steven_L said...

Some of the smaller fund managers provide an excellent service, Ruffer for example.

The pensions/find management cartel needs breaking up as far as I'm concerned and replaced with a self invested model using smaller fund managers.