How does the current crisis affect your fund manager?
Sunday, 12 October 2008
I was interested in an article by Kate Burgess the FT . She quoted Roger Yates, the recently resigned CEO of the fund manager Henderson, who said "The asset management industry is at an inflexion point," he said, adding that too many asset managers are too complacent about existing business lines assuming they would return to previous levels in the medium term. But investors are becoming more hawkish and less tolerant of high charges for mediocre performance.”
So the boss (well ex boss) of a leading fund management group is talking about high charges and mediocre performance. It is nevertheless refreshing for to hear such comments, and it does bring into question, how do these managers add value and in particular, what is their mind set, in this financial crisis? The FT goes on to say “Most fund managers are scrabbling to contain the damage by cutting costs. But as revenues decline, those with high levels of debt, such as New Star Asset Management, risk being pushed up against their banking covenants”
How many fund managers are facing similar turmoil? What questions do you ask these fund providers, especially those managing your money, how this crisis is really affecting their business models?
Then you need to consider how is the crisis is affecting the individual fund managers’ motivation and behaviour? How would you feel if the company you work for is cutting costs and possibly laying off employees? What if your income was due to be cut? Are the managers going to be focused on your money, first and foremost, or will they be distracted about their own future? Will they in fact take more risk with your money in the hope of better returns to benefit from bonuses? If their decisions do not work, it’s your money they are losing not necessarily their own! Conversely, they may be taking less risk to protect their job and therefore may not be omnipresent by searching out new opportunities. Their finger may no longer be on the pulse! These are issues potentially facing some of the fund management groups.
Fundamentally, investors are accepting what is called as ‘fund manager’ risk. As investors you need to minimise this risk whilst seeking maximum return. More of this later.
But lets go back to an earlier point above. Are fund management groups actually really experiencing pressure?
Actually, many are losing funds to manage. Here is what the FT went on to say “Analysts at Morgan Stanley argue that risk aversion has prompted a huge flow from retail funds to deposits across Europe, encouraged by the banks, which are seeking to bolster their capital bases. In the first six months of the year, net outflows across Europe from bond and equity mutual funds reached a record of more than €130bn (£100bn), according to Lipper Feri, the data provider….The same nervousness about the prospects for asset management is prompting banks such as Santander, the Spanish lender that recently bought Alliance & Leicester and the deposit book of Bradford & Bingley, to put their fund management businesses up for sale.”
So what does this mean to you if you have your money invested by many of the retail fund managers? The future may be not quite what we all expect!
That means you should be reviewing your holdings with your fund managers. You need to satisfy yourself they are working for you? What parameters have you set to measure their success or failure? I repeat the statement above “….. investors are becoming more hawkish and less tolerant of high charges for mediocre performance” Are you?
Every investor needs to start asking these and many more questions, yet even in the face of evidence that makes it crystal clear what investors need to do, many investors do not act in a rational manner. This is no surprise as the answers lie within the world of behavioural finance. To illustrate, there is what is termed ‘a fear of regret’ and ‘belief persistence’. Even when a clear course of action is appropriate, people prefer to do nothing or remain indecisive for the fear of making the wrong decision. Also belief persistence can cause people to ignore evidence or indicators that are contrary to what they believe to be in their own best interest.
At Murray Round we encourage all investors to take action. Asking questions of those advisers and fund managers that may have delivered in the past is not easy, but it is your money. If you fail to take responsibility for your money, you cannot blame anyone accept yourself. As the famous investor Benjamin Graham said: “The investor’s chief problem and even his worst enemy is likely to be himself.”
We agree with the FT comments that say there is a sea of change which is a shift to ‘spicier’ fund managers and cheap index tracking funds.
There is no need to accept the motivations, fears, hopes, aspirations, concerns, in fact, all the emotions of retail active fund managers, instead, you can avoid ‘fund manager risk’ by applying a systematic approach to investing, using passive funds, which means investors have a greater change of experiencing a successful investment experience over time.
It’s what we do. Call us. It these times of uncertainly, a systematic plan is vital. The future is here now if you want it.
posted by Murray Round Wealth Management @ 14:42,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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