Too many investment funds are badly managed
The retail investment fund management industry has done Brits proud over the years. It’s helped many of us become (seriously) richer by investing our pensions and individual savings accounts (Isas) wisely in vehicles such as unit trusts and open-ended investment companies (Oeics). It’s a British success story – and let’s be honest, there aren’t many of those around. Rejoice.
At the last count, the sector managed assets totalling £855 billion, making the UK the second largest investment management centre behind the US. And that big sum doesn’t even take into account the £110 billion that the investment trust industry manages on our behalf.
Investment trusts have looked after our money for longer (since 1868) and far more successfully (bar the unfortunate split capital debacle of the late 1990s).
Yet, this ‘success’ doesn’t mean that everything is hunky dory in retail fund management. Far from it. As in all industries, there are always areas for improvement.
To cut to the chase, we need to be given an overall better deal, whether in terms of the charges we pay on the funds we invest in, or the way our investment funds are managed.
Some funds are too expensive, while others don’t actually deliver what they promise you on the tin (they’re a fraud).
In some ways, retail fund management is a victim of its own success. The move towards more people investing their own money – online, through Isas and self-invested personal pensions – has spawned the birth of ever more fund providers wanting to get in on the act and far greater fund choice.
Insurers and banks are now all at it – as well as investment houses set up purely to manage people’s money. At the last count, there were more than 2,600 investment funds available for us to invest in.
This increased choice is great on the surface (competition and all that), but it doesn’t mean it has helped raised the quality bar. Too many investment funds are still managed poorly – and, sadly, too many people continue to buy them, either because their bank strong-arms them into it or they are unable to distinguish the fund dross from the gilt-edged.
For example, some 188 investment funds are classified as UK All Companies – funds investing in the UK stock market. Most are actively managed (have a professional manager at the helm who makes the investment decisions) and invest across the market in blue chips as well as lesser known companies. Others track either the performance of the FTSE 100 or FTSE All Share indices (these are run by complex computers, ‘robo’ managers).
Over the past five years*, this collective band of UK All Companies funds has delivered an average performance of 40.1%, better than the FTSE All Share(34.3%).Yet the average hides the ‘dross’.
A couple of active funds – Scottish Widows UK Select Growth (Lloyds Banking Group) and Halifax Special Situations – have somehow managed to lose investors’ money over this period, recording losses of -8.7% and -3.9% respectively.
Other bank- managed funds (again managed actively) have failed to beat the FTSE All Share, such as Halifax UK Growth (28.4%), Santander UK Growth (23.8%), and Scottish Widows UK Growth (18%). Sadly, none of these – Halifax UK Growth (£4.5 billion), Santander UK Growth (£869 million) and Scottish Widows UK Growth (£2.4 billion) – are minnow funds.
People continue to be sucked into them because of the persuasive sales patter of the banks.
What make this worse is that they are not being properly actively managed. For example, Scottish Widows UK Growth is a closet tracker – mimicking a FTSE 100 index tracking fund, but underperforming and charging the proverbial earth in the process.
Thankfully, the regulator is on to this and has reminded the industry that it must not dress up mutton as lamb. Active funds must be managed actively, not in line with an index. So when fund hunting, ignore those ‘managed’ (I use that term loosely) by the banks. Instead, seek out those where the manager uses their stock-picking skills to add value.
Plenty of websites will help you find these stars - including Moneywise, with our funds and investment trusts comparison tool serving as a great starting point.
Put the great back into your investment portfolio. Bon chance.
Read Jeff Prestridge's views on why you shouldn't rely on the new state pension to fund your retirement or why saving cash is a poor choice in the long run.
Alternatively, you can read all of Jeff’s previous columns here.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.