Give The Fund Managers An Even Break - The Index Sure Doesn't
Sydney Morning Herald
Saturday September 29, 2007
Ever been hypnotised? I have. About 20 years ago, during an attempt to try and stop smoking. An hour of mind games up against years of physical addiction. No contest. But if not a cure, it was an education.
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. You have to relax into a near catatonic state, so the images and messages can be downloaded straight to the core without your 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 is a bit like the "cultural iceberg" metaphor. If culture is an iceberg, then above the water line 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, judgments. Things that have been downloaded by virtue of where we were born and what our parents read us as small children. Things that make us us. You can't change them. The stockmarket has a culture. Things that are below the water line (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 past few years. Things have changed the above-the-water culture. The internet, easy access to investment information and the ability to deal easily in the stockmarket have been a cultural revolution. It has spawned a culture that says looking after your own investments is clever and fund managers are nasty, nasty, nasty people driving BMWs while our funds underperform the market. And underperform they do. Of course, they do. The index they are compared with 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 out. No rent, no employees, no wages, no tax, no stationery, no marketing, no experienced fund managers to keep happy in case they go somewhere that pays them more. No costs. The index doesn't even have customer service issues, reports to send out, families to look after. 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? Indexes constantly replace bad stocks with good stocks. When you take the 10-year average return of the ASX100 you are 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, with the index. The index doesn't exist as a business. It is inaccessible in real life. Average market returns, while statistically correct, are a fantasy expectation that delivers us unrealistic expectations, which fund managers, unfortunately for them, are held to.You can only compare fund managers with 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 are not competent, interested and don't have the time they shouldn't take the responsibility. And they don't need to. There are many competent funds and fund managers out there prepared to take the burden and because of that their fees become worth the paying.You have to ask whether the critics of fund managers and fund management fees are doing us a disservice - painting a whole industry with the same brush, and 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.
© 2007 Sydney Morning Herald