COMMENT: FT Editorial
Last year was a bleak one for Britain's active fund managers, who face the prospect of an unhappy New Year to come. 2019 will be remembered as the year when the industry's talisman, the star stockpicker Neil Woodford, was shown to have feet of clay and had his flagship fund wound up. One of his protégés, and another of the old-school active managers, Mark Barnett of Invesco, was shown the door after his fund's performance flagged. There have been unflattering revelations about the sales tactics and incentives at St James Capital, a traditional home for upper-middle class retirement savings. As if that were not enough, Mr Woodford's demise shone a harsh light on the promotion of active funds at Hargreaves Lansdown, the popular money-management platform in the UK.
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These events have tarnished the record of star stockpickers. More worryingly, they have helped to highlight the already poor performance of the active fund management industry. Evidence has piled up that active fund managers consistently lag benchmarks, once fees are included.
Analysis of European funds by Morningstar, a data provider, showed that active funds have not kept pace with index trackers in the past ten years. Research in 2016 by S&P Dow Jones, the index provider, found that 99 per cent of actively managed US equity funds underperformed. Investors have voted with their feet; according to Morningstar, in the year to June, capital flowed out of active mutual funds in the US and Europe at the highest rate in at least three years.
Investors deserve better. Active fund managers play an important part in the market and can hold chief executives and boards to account on issues such as pay and strategy. Ordinary savers need to have faith that the investment industry works for them.
Fund liquidity has again come to the fore as a risk. The recent decision by M&G to bar withdrawals from its UK property fund underlined the fact that open-ended funds can be the wrong home for illiquid assets — if investors want out, the managers must have ready cash available to return their money. Similarly, the June suspension of Mr Woodford's Equity Income Fund to protect it from a wave of unsustainable withdrawals prompted regulators across Europe to launch probes into fund liquidity.
In the UK, the regulator must take some of the blame for the recent failures. The Financial Conduct Authority, under Andrew Bailey, the incoming governor of the Bank of England, has been slow to act. Long-awaited rules published in September aimed at protecting investors in open-ended funds invested in illiquid assets will not take effect until September 2020. Greater transparency is required; ordinary investors do not have enough information to foresee the risks. The industry must regain public trust.
There is some reason for cheer. Stockpickers who specialise in small and mid-cap US companies secured a rare victory over index trackers in the 12 months to the end of June. During that period, 60 per cent of actively managed small and mid-cap stock funds beat the indices they are measured against, net of fees, according to data from S&P Global.
The best opportunity for active fund managers to prove their worth may come in the next financial downturn. The record-breaking current bull market will run out eventually. If there is a significant correction, stockpickers need to show they can beat the index funds. The best outcome for the active funds industry would be if 2019 were remembered simply as one that put some bad managers out of business.
Written by: FT Editorial Board
© Financial Times 2020