The savers and investors are the people who can afford their own pensions. They have less need to fall back on the State. They are lucky. But still the way the whole system is geared to take their money, feed it to skills-less fund managers and give back poor returns means they are being ripped off.
Our politicians need to re-examine this travesty. Each week I receive emails from people who don’t realise the reason they are not making more of their money is that the so-called experts are ripping them off.
I wrote in the Financial Times to this effect many years ago. “Trust Yourself, not a Fund Manager”
They’re supposedly the best equipped to manage your funds. Billions of dollars are entrusted to them, and they have global resources at their disposal.
So should you assign some of your money to fund managers? After all, there’s been a recent proliferation of fund supermarkets.
The lawsuit by Unilever’s Pension Fund against Merrill Lynch alleging fund manager negligence in underperformance back in 2001 was neither the first nor the last and showed that if the mighty Unilever can be so unhappy with their fund manager, what hope does a regular person have?
Little hope, according to ample evidence.
“The deeper one delves, the worse things look for actively managed funds…99% of fund managers demonstrate no evidence of skill whatsoever.” concludes William Bernstein in his study of the fund industry.*
Investment legend Peter Lynch in Beat the Street** confirms, “all the time and effort people devote to picking the right fund, the hot hand, the great manager have, in most cases, led to no advantage”.
And Warren Buffett in his 1996 letter to his Berkshire Hathaway shareholder advocates a passive index tracker over fund managers: “…the best way to own stocks is through an index fund...”
But the most damning evidence against trying to pick a fund manager is their own performance.
Only 9 out of 355 funds analysed by Lipper and Vanguard beat their market benchmarks from 1970-1999. Analysis by www.IFA.tv of the large Morningstar database of equity funds could find ‘no discernible pattern of persistence in superior manager performance.’
What about only picking the best performer fund managers.
Unfortunately, all the top 10 performing funds in any year drop from 1st place to nearly last place among all funds within in 2 to 4 years according to a 26 year study by DALBAR. The reverse, unfortunately, is not as certain.
The study found for instance that from 1998, the average stock fund investor earned returns of only 5.29% per year, while the S&P 500 returned 7.20%.
Yet despite this, 75% of mutual fund inflows follow last years "winners", according to fund researcher www.morningstar.com.
Even Nobel Laureates agree on the hopelessness of picking top performing fund managers. Prize winner Merton Miller observed in a documentary about funds, “If there's 10,000 people looking at the stocks and trying to pick winners, one in 10,000 is going to score, by chance alone, a great coup, and that's all that's going on. It's a game, it's a chance operation, and peoples think they are doing something purposeful... but they're really not.”
So what is to be done? If fund managers can’t beat market benchmarks, then we could invest in index trackers and be assured of at least matching the benchmarks. Vanguard and Barclays are two major providers.
And for Unilever and Merrill Lynch? With so much evidence about poor fund manager returns, little wonder Unilever settled their lawsuit. After all, the fund managers could turn around and say, ‘what did you expect?’
Alpesh B Patel
*The Intelligent Asset Allocator, William Bernstein, (McGraw-Hill 2001).
**Beat the Street, by Peter Lynch and John Rothchild (Simon & Schuster 1994)