A Financial Education over 25 years

I joined the insurance industry in February 1987; the following October the FTSE100 crashed. As a newcomer to the world of investment I never saw the crash coming, and interestingly my elder colleagues never saw it coming either. And yet the FTSE100 had spent the previous 9 months on an almost vertical upwards trajectory; in hindsight the crash was inevitable. The advice we passed on to investors back then was…

“don’t panic, the markets will recover”…

and recover they did, eventually. Where did we get this advice? We received it from Abbey Life’s all-knowing fund managers. Back then we weren’t paid to think, we were paid to sell.

Fast forward to the Dotcom crash at the end of 1999. By then I had been an Independent Financial Adviser for a few years. No longer did I believe in just Abbey Life because I could sell the products of the best. We believed in John Pullar-Strecker and his amazing Technology Fund, after all he had won major awards. Again the advice to investors was don’t panic, the fund will recover. Seventy five percent had been lost in John’s fund and to this day it has never been fully recovered.

By 2007 an investment in most Commercial Property Funds had grown by almost 50% over the previous 3 years. Conventional wisdom dictated that

“a well-balanced portfolio should hold 25% of its value in Commercial Property funds”

and almost nothing in Cash, although back then a 5% return could be had from Cash funds without risk. I didn’t agree and sold all my clients Property Funds before they crashed losing 45% and locking individuals money in them for 6 months.

The Penny Dropped

Thankfully by 2006 I had already virtually stopped attending any free meeting that was sponsored by a fund provider and started only scheduling meetings in my diary where I had to pay to attend. One of those meetings felt like a confessional.

“Good Morning. My name is Howard and it has been several years since I lost my faith in the Fund Management Industry in general and Active Fund Managers in particular”.

I had understood that I could not rely on any participant in the Fund Industry to tell the whole truth. I reviewed my investment knowledge to date and found it was mostly built from an industry that was trying to sell funds to me. I started to read the original research material that had been quoted to me for all these years; it had been misquoted and twisted to fulfil the aims of the Fund Management Industry.

I could finally describe myself as Independent. I had been able to deal with all companies for a decade, but turning my back on most of them made me truly Independent.

Today I manage around £30 million on behalf of my clients. I’m not an oracle, I can’t read the future but I have become a professional cynic. I want independent proof before I invest a penny. I stopped believing what I was told by fund managers with a sales agenda and started to look for the truth; that journey continues.

An Active Fund Manager tries to beat his benchmark, which is usually an index; a Passive Fund just tracks that index. In a world of

“You get what you pay for”

you would think that active management which is the considerably dearer option would always win. That is what we are told in the Sunday Investment Supplements. (With advertisements paid for by Fund Management Groups). I have some evidence below which proves what I have believed for some years now.

1 year fund performance for the year ended 31st March 2011

Neil Woodford’s Invesco Perpetual Income fund
Size: 8 billion
Charges: TER of 1.68%
Return: 7.78%
Anthony Nutt’s Jupiter Income Trust
Size: 2.4 billion
Charges: TER of 1.69%
Return: 7.58%

Christine Franquin’s Vanguard UK Equity Income Index
Size: 60 million
Charges: TER of 0.25%
Return: 11.60%

Data www.morningstar.co.uk correct 18th April 2011

In all, almost £10.5 billion is invested in the two most popular funds and a mere £60 million in the Vanguard Fund. Interestingly we have a little over £6 million of our clients’ money in the Vanguard fund making us collectively one of the largest investors!

Most of the funds we use today are passive trackers. These funds reduce client costs and invest only where they say they are invested. (Neil Woodford invests 15% of his UK fund outside of the UK).

The rewards of escaping from the opaque active fund management industry are becoming clear to see. We can achieve this due to scale. The minimum investment Vanguard will accept is £100,000. Investing on an institutional level is one of the ways we are able to offer un-common sense and value as our investment scale continues to grow.