Is it just us, or is the UK investment industry increasingly starting to resemble Premier League football?
There are, of course, the star managers, very highly paid but under constant pressure to perform to expectations. Then there are the top funds who, like the glamour clubs, are always vying for attention; and the journalists and pundits, whose salaries depend on it, and are therefore only too happy to oblige.
Last - and usually least - are the investors, the fans, the people who ultimately pay for the circuses that these respective industries have become. As if the results they have to put up with aren’t bad enough, they’re often ripped off, and usually taken for granted. Yet they remain touchingly loyal - ever hopeful that one day their loyalty will be rewarded.
Anyone in any doubt about the growing similarities between the two industries should take a look at the size of the biggest investment funds. Standard Life’s Global Absolute Return Strategies Fund is now home to nearly £18 billion of investors’ money; the M&G Optimal Income Fund weighs in at £15.2 billion; and the Invesco Perpetual Income Fund at £10.4bn.
Whichever order you put them in, these are the Manchester United, Manchester City and Chelsea of the fund management world, with the likes of the Newton Real Return Fund and the M&G Global Dividend Fund competing for comparison with Arsenal and Tottenham.
We shouldn’t be too surprised at the emergence of these ‘super-funds’. After all, fund inflows are always greater when shares have had a good run, and the FTSE 100 has risen around 90% from its low of March 1999.
Also, as William Bernstein explained in one of our recent videos, human beings are social animals, and we like to copy what others are doing, so it’s only natural that investors should be attracted to the most popular funds.
But is the trend towards bigger funds good for investors? Well, we’re in two minds.
We’ve expressed concern in the past that there are far too many funds to choose from. Typically they’re launched amid huge marketing hype, only to perform so badly that they’re closed down within a few years. In that sense, it’s a positive thing that investors are focusing on a smaller number of larger funds which have performed relatively well.
On another positive note, larger funds, by their very nature, tend to be more diversified than smaller ones, whose value can be severely dented by the demise of just one or two stocks. Diversification, as we’ve repeatedly emphasised, is one of the golden rules of investing.
But super-funds give cause for alarm as well. For example, they’re especially prone to key man risk. Just as Sir Alex Ferguson’s retirement has led to speculation that Manchester United will struggle to maintain their recent level of success, so the departure of a Neil Woodford or an Anthony Bolton can send investors scurrying for the exits.
Another worry is that if a large number of investors suddenly do decide they want to invest elsewhere, some larger funds might not have sufficient liquidity to allow them to take their money out.
But our biggest reservation with these giant funds is that they promise investors a peace of mind that is, at best, illusory. Past performance is no guarantee of future success, and yesterday’s star manager may not be tomorrow’s.
In fact, on the contrary, all the evidence suggests that managers who’ve been successful running small funds are less so when asked to manage a larger fund. Very often they take the easy route and resort to ‘closet indexation’: in other words, they buy the big stocks that dominate the major indices. Investors are then paying a premium for active management, when their investments would grow just as fast, at a much lower cost to themselves, in index funds.
Of course, there are investors who just enjoy the punt, rather like football fans who dream of winning the Premier League title despite years of mid-table mediocrity and flirting with relegation. If you’re one of them, go ahead and enjoy the ride.
The biggest difference between investing and football, of course, is that investing is not a game. Ultimately, it’s your financial security at stake. And if you don’t feel comfortable pinning all your hopes on one star fund manager - or even a clutch of them - the best advice is not to play the game.
Photograph courtesy of the Daily Mail.