• David Butcher
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Should active fund managers be less, ahem, 'passive' in their communications?

If you follow the investment industry you might think active funds are dead and buried.

“Investors are giving up on active funds”, says the Irish Times. “A bear market would be a death knell for active funds” (Bloomberg).

Then there’s Neil Woodford, a star active fund manager now grappling with huge losses.

So what does this mean?

In essence, if you invest your money with an expert firm that tracks an investment market you’ll do no worse (and perhaps better) than if you pay another expert to try and beat the same market.

Just to be clear a popular passive fund will cost you 0.22%* and you’ll pay 1.05% for an active one**.

The debate boils down to this: are active money managers worth the extra fee?

Academics tend to say ‘no’. Their work shows that few active fund managers consistently beat the market. I could go into a lot of detail here – but many others have done this really well – not least someone clever at Nutmeg.

But to my mind, none of this suggests active funds are dead and buried.

First, there’s a lot of money in active funds. UK fund managers look after some £7.7 trillion – and the split is around £3 in active funds for every £1 in passive***. True, the numbers used to be around £4 : £1 ten years ago, but that comes after the financial crisis helped reduce trust in financial professionals.

It’s going to take a lot of time for such huge sums of money to achieve anything like £1 : £1 parity.

Second, and this is really important I think, is that active managers have never really made their case.

Funny isn’t it? My long list of companies that publicly talk up the value of active managers is as follows: Jupiter Asset Management, AQR (in a research paper)… and, er, that’s it.

Apologies if I missed your firm. Please let me know. I also don’t know of a large body of academic work that makes the case for active. Again, comments are welcome.

To my mind, the story could go like this:

  • You need a decent standard of living in retirement, and the money you save needs to grow at a rate above that of inflation
  • Market growth alone may not be enough
  • So one answer lies in trying to find companies and other things with the potential to beat the market and / or avoiding those who will lag the market
  • And that’s where active fund management comes in

Why don’t we see this argument everywhere? Why don’t active managers point out that a passive fund will never match the market, after they’ve deducted fees?

Third, there is a vast body of human evidence that active management works.

I don’t know how many people in the UK have been helped towards retirement by active managers. It’s probably a subset of the 12 million people over 65 in the UK****. Where are their stories? Could someone superimpose all that aggregated data onto the performance of the market? I’ve long thought the industry is more comfortable talking numbers – rather than human experience. So this could be the reason to change that.

I have no dog in this fight. Our client list features active, passive and all things in between. It’s just that, when passive managers make their case with eloquence and imagination, it seems there’s only one dog fighting.



** https://www.moneyobserver.com/fund/Fundsmith-Equity-T-Acc

*** https://www.theia.org/sites/default/files/2019-04/20180913-fullsummary.pdf

**** https://www.ons.gov.uk/peoplepopulationandcommunity/

Disclaimer: at the time of writing, I have a personal holding in The Fundsmith Fund, and no commercial ties with any parties mentioned in the article.

Author: David Butcher

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