Cover story
[ PASSIVE INVESTING ]
6 / 7
“Never has so much been
taken from so many, by so
few, for so little in return”
average profit margin
for UK fund houses
investor. That’s not a theory or an
opinion; it’s a mathematical fact.
All of this makes uncomfortable
reading for active managers. After
all, they’re paid substantial salaries,
as are their chief executives. Then
there are the shareholders of the big
asset management firms, who’ve
earned generous returns over the
years. As last year’s FCA report on
competition in asset management
showed, the average profit margin for
a UK fund house is 36 per cent.
Active management, in short, has
been a jolly good wheeze. In the words
of Michael Johnson from the Centre
for Policy Studies, “Never has so much
been taken from so many, by so few,
for so little in return.”
FE TRUSTNET
The bottom line is that managing
other people’s money is, to quote
Vanguard founder Jack Bogle,
“awesomely lucrative”. This fact
alone goes a long way to explaining
all those articles I mentioned,
warning of dire consequences if
investors continue deserting active
management in their droves.
“Bogle’s Folly”
Of course, none of this is new. When
we interviewed Bogle, he recalled
the criticism of his first index fund
for retail investors, launched in 1975.
They called it “Bogle’s Folly”; some
even said it was “un-American”.
Fidelity chairman Edward Johnson
remarked: “I can’t believe the great
mass of investors are going to be
satisfied receiving average returns.”
Fidelity has long since given up on
holding back the tide. It’s now the
second-largest provider of index
funds, after Vanguard, and it recently
introduced the first zero-fee index
funds into the US market.
Threatened livelihoods
So can we expect any let-up in the
propaganda war? I’m afraid the
answer has to be no.
Larry Swedroe, the US investment
author, recently wrote: “Proponents
of active management will continue
to attack passive investing. In almost
every case, these attacks not only
are without foundation, they also
are absurd and easily exposed as
such. But that doesn’t stop them. The
reason is simple: passive investing
threatens their livelihood.”
It isn’t just active managers
whose livelihoods are threatened
by indexing. Financial advisers
no longer receive commission
on products they sell, but many
intermediaries still have a vested
interest: stockbrokers and investment
consultants are obvious examples.
What I, as a journalist, find
interesting are the changing attitudes
in the financial media. There’s
always been a symbiotic relationship
between the media and the fund
industry. The industry knows that,
more than anything, it’s stories that
sell financial products, while the
media needs not just the advertising
revenue, but the constant supply of
subjects to write about.
It’s hard to bite the hand that feeds
it, but in my experience, journalists
want to be hacks, not flacks, and
help their readers achieve better
outcomes. There are encouraging
signs that journalists today are less
inclined to let the industry get away
with saying some of the things they
were willing to print in the past.
Investors need to hear the other
side of the story. Thank you to FE
Trustnet Magazine for allowing me
this opportunity to put it to them.
trustnet.com