E Road Less Traveled

We walk the road less-traveled.

British fund management overseers are under attack for allowing the asset managers they regulate to overcharge by claiming to offer expert stock-picking, and in fact then to only passively copy an index. Moreover they charge high fees to small investors for their “closet tracking”, about triple what large institutions pay for the same portfolios. Fees are so high that the operating margins of fund managers listed in London is 36% compared to only 14% in sectors like technology or pharmaceuticals.

Of course they don’t tell retail investors about the high hidden charges they are imposing or the kickbacks they get from index funds of other investment vehicles or the commissions paid to fund salesmen (called financial advisors).

The solution adopted by US investors is to put their money directly into an index fund to avoid expensive management fees. But stock market tracker funds really don’t work better, particularly when they aim an a small and/or exotic section of the market. As money flows in and out they have to buy and sell often at the worst possible moment: they buy on exuberance and sell at despair, and of course also incur trading charges. So they cannot ever properly track whatever they “hot” idea they claim to cover: marijuana stocks; self-driving vehicles; artificial intelligence; 3D printing; checkpoint inhibitors—whatever the best-seller is.

More from Britain where the worst abuses of retail investors occur, starting with the comments of a leading fund manager whose shares we own, and then highlighting some of our picks which index funds ignore. Despite July 4 there will be a blog tomorrow but there will be a hiatus later this week when I fly home to New York.

Sterling yesterday was settling over $1.30 and this means British shares we own are gaining for US investors by more than the 16 points the FTSE 100 index has risen by. I think the dollar’s fall is related to shenanigans by President Trump but I am prejudiced against him and in favor of the press, of which I am a member.

Finance

*Standard Life is an insurance company that after a merger with Aberdeen Asset Management has become a global leader in running funds, including several bond funds we own. (Unlike stocks, bond funds cannot simply track an index because the bond market has too many different entities in it.) The co-CEO of the combo is Keith Skeoch who wrote yesterday in the UK Financial Times about current trends: broaded popular investment in funds; low interest rates and return; digitization and tech; and customers’ lack of trust. Of the latter, he wrote: “Trust needs to be earned and, like beauty, it is in the eye of the beholder.”