Fund Manager Performance Is The Tip Of The Iceberg
The Age
Saturday September 29, 2007
EVER been hypnotised? I have. About 20 years ago, an attempt to try and stop smoking. An hour of mind games up against years of physical addiction. No contest. But it was an education if not a cure.
Nicotine embeds itself deep in your brain. It seems the only way to get it out is to embed images and thoughts even deeper, into your subconscious. To do that you have to relax into a near catatonic state so the images and messages can be downloaded straight to the core without your weak conscious mind filtering, questioning or weakening them on the way in.Net result, you hate smoking and you don't really even know why. You just do.It's a bit like the "cultural iceberg" metaphor. If culture is an iceberg, then above the waterline are all the things that are explicit, visible, taught. Below the water line is the hidden culture. Things that just "are": habits, assumptions, understandings, values, judgements. Things that have been downloaded by virtue of where we are born and what our parents read us as a small child. Things that make us, us. You can't change them.The sharemarket has a culture. Things that are below the waterline (decades of accepted financial theory) and things that are above the water line (things we have learned). There have been a lot of things to learn in the last few years. Things that have changed the above-the-water culture. The advent of the internet, easy access to investment information and the ability to deal easily in the sharemarket have been nothing short of a cultural revolution. It has spawned a culture that says looking after your own investments is clever and fund managers are nasty people driving around in BMWs while our funds underperform the market.And underperform they do. Of course they do. The index that they are compared to is a fantasy. It has no dealing costs when the index constituents change, no administration costs when the customers want to put money in or take it out. No rent, no employees, no wages, no tax, no stationery, no marketing, no highly experienced fund managers to keep happy in case they go somewhere that pays them more. No costs at all. The index doesn't even have customers, customer service issues, reports to send out, families to look after. In fact it has no responsibility, no risk and no pressure. It doesn't even have to pick stocks.And the index cheats. Did you know that it fools us all day, every day? Indices constantly replace bad stocks with good stocks. When you take the 10-year average return of the ASX 100 you are actually looking at an index of the best 100 stocks each quarter over the past 10 years, not the same 100 stocks. If you want to achieve quoted index returns you have to trade out of the rubbish and replenish with the good stuff in the same way the indices do.So you can't compare fund manager returns, your returns, to the index. The index doesn't exist as a business. It is an ivory tower, inaccessible in real life. Average market returns, while statistically correct, are a fantasy expectation that delivers the rest of us unrealistic expectations to which fund managers, unfortunately for them, are held.You can only compare fund managers to fund managers, not the index. So let's stop bagging them for underperforming and start questioning this culture of telling everyone that fund managers charge too much because they underperform. It drives people to take on the investment responsibility themselves.But if the stockmarket is not their thing, if they aren't really competent, interested and don't really have the time they shouldn't take the responsibility. And they don't need to. There are many very competent fund managers out there prepared to take the burden and, because of that, their fees become well worth paying.You really have to ask whether the critics of fund managers and fund management fees aren't doing us a disservice. It is painting a whole industry with one brush and, in doing so, goading people to do what they don't really want or need to do and, in some cases, can't do or fail to do.Marcus Padley is a stockbroker and the author of the daily sharemarket newsletter Marcus Today. For a free trial, please go to www.marcustoday.com.au
© 2007 The Age