The Ticking Investment Time Bomb – How Investors Sold a Myth

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Or for decades, British retail investors were sold a myth. The UK investment industry weaves the story that higher fees for active management relative to passive/index managers bring better performance, especially in tough times. When markets get tough, you can turn to cash or more defensive stocks to protect your hard-earned savings. Back in 2020, the Schröders CEO said index fund weakness would come like any recession “More attention is being paid to the shortcomings of mechanized trade, known as passive trade.”

show data Inactive Investment management really wins the day. SCM Direct analyzed and averaged the year-to-date 2022 performance of each geographic investment association equity sector against comparable index benchmarks underThe performance was 3.9%. The average fund underperformed the comparable benchmark in 17 of the 18 sectors analyzed. One sector that outperformed was European stocks, but the gap was just above 0.

Further analysis revealed that the average passively managed fund is charged 1.24% per year (including trading costs and performance fees), which is four times the 0.32% per year charged by “passive” funds.

For that reason it is a time bomb for the UK investment industry. For years, customers didn’t really know what they were paying for their fund or wealth manager. Thank you to the new law of 2018 that SCM founders Allen and Gina Miller have campaigned for for many years.

The question is, why are these stars of the active management world doing so poorly? There are myriad factors in the answer. Too many into overvalued growth stocks, too few into oil and gas stocks or banks, too many trades at inopportune times, too many fees to fight. However, a fundamental compulsion changed the rules of the game. In the past, proactive professional managers could use better and earlier information to beat private investors. Now that everything is upside down, individual investors can spend more time examining company data. This data is now free and distributed simultaneously to all investors. The active fund manager advantage is gone. Of course, there will always be some people with extra skills or luck who can sometimes beat the odds, but not many. Even the great Terry Smith, who manages the UK’s largest fund (£22bn), has lost 21.4% of investors in 2022, compared to a 13.8% loss against the comparable benchmark (MSCI World Index).

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The investment industry is a well-oiled marketing machine that sells retail investor stories. Now it turns out that one of the main stories is a myth. A survey of over 2,000 people across the UK by the SCM Direct Commission in late May found that low fees and charges are the most important factors (even more important than performance) when investing, particularly among youth groups. Perhaps that’s why the stock market now rates the old-fashioned fund managers so under-priced – Jupiter at 9x upside potential, Leontrust at 8x, and even Schroders at 12x. They are rapidly evolving into mature, low-growth businesses, bucking the ongoing trend of customers seeking lower financing costs or lower operating costs or both. Many of their businesses, not just their investment style, are ticking time bombs if not quickly embraced and adapted to the modern world.

Source: SCM Direct

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