As we head into the Isa season, no matter how muted it may be, it is an appropriate time to focus on...
As we head into the Isa season, no matter how muted it may be, it is an appropriate time to focus on a key issue for the industry, which was recently addressed by one of the giants of the US mutual fund business.
Jack Bogle, founder and former chairman of Vanguard, in a January speech talked about the trend he felt had developed in the business of salesmanship over 'stewardship'. His comments refer directly to the trend for fund managers to become traders rather than stock owners on the back of rising marketing and operating costs and falling returns.
According to Bogle, while the S&P 500 returned 13% per year over the past 20 years, the average equity mutual fund returned only 10% on the back of rising costs. If you look at UK All Companies as a comparable British sector, the 194 funds lost nearly 15% on average while the FTSE All-Share lost nearly 11%.
The 3% differential in both cases is purely coincidental but the figures highlight the dilemmas for the industry. As one fund manager said to us this week: 'Recessions find what auditors don't.'In the case of investors and advisers it's quite simple. Is the industry acting as a salesman to or steward of investor's assets?
While there are good and valid reasons for underperformance, there are not valid and good reasons for expensive underperformance. This Isa season is developing like many others, but perhaps without the ferocity of previous years. Investment themes ' or are they sales stories ' have emerged from the wreckage of the market. It is once again corporate bonds, topped up with UK equities and a bias toward equity income funds.
Both asset classes have great merits ' sold and advised on in a responsible, steward-like way. Corporate bonds are a solid and reliable provider of income in the region of 6%-8%, anything above starts to look like a risk to underlying capital and investors and advisers should be aware of this.
UK equities do look relatively cheap against a backdrop of a generally solid UK economy, and with the roll-call of top UK managers around ' Bolton, Mott, Woodford, Frost, Patterson and others ' investors should be exposed to this sector. But again, it should be with sensible expectations in mind. The UK investment industry used to be a fantastic steward of investors' money. It is time to get back to that approach, and the Isa season is a great opportunity to start that process.
All-day event on 24 April
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