What caught my eye this week.
Fancying that you’re living at the end of progress is a recurring human failing. Think of the Roman cartographers who didn’t put anything on their maps west of Britannia, the IBM president who in the 1940s thought the world would need five computers, or the bonce who wrote The End of History.
Investors are no different. How many of us believe we’re marching ever upwards to a future inevitably dominated by index funds?
The secret is out, and money is flowing out of active funds and into trackers. What could possibly stop Vanguard ruling the world? Even I did a victory lap to that end to mark the death of index fund pioneer Jack Bogle last month.
Yet the same technology that makes it so cheap for Vanguard to run its index funds (hint, it has more than five computers) could also be their undoing.
In an op-ed for Investment News, Joshua Levin argues that:
In the next few years, the entire rationale for investing via funds will dissolve.
Advances in technology have transformed industry cost structures. Absent the need to pool assets for volume discounts, advisers and relationship managers can skip the one-size-fits-all cookie-cutter vehicles.
Instead, financial advisers will use software to truly customize portfolios, resulting in a more engaged and loyal client base.
It’s not the first time I’ve heard such talk. For instance robo-adviser platforms are exploring similar tactics in the US to eke out additional returns from tax loss selling.
I have some sympathy for this fund-less vision – and certainly a lot of curiosity.
But it’s notable that the platform Levin works for is focused on socially responsible investing.
Nothing wrong with that. However as a guest post on the Epsilon Theory blog pointed out in an unrelated article this week, ethical investing is being seen by some active managers and advisors as a way to reinvent active management for a new breed of customer.
And a handy side effect is they can keep their jobs and higher fees:
This is an admittedly clever strategy. At least in theory, it moves the conversation away from fees and performance.
Now we’re talking values.
‘Cause if performance is pretty decent, and the fees are reasonably competitive, wouldn’t you rather have a portfolio aligned with your values? Isn’t the alignment of your investment capital and your values worth it?
Don’t you want to make a difference?
Watch this space. And don’t write history off too soon!
From Monevator
Important note: We have republished Tuesday’s article: ‘Who are you KID-ing? Understanding the ongoing charge figure of an investment trust. The first version had a big error in how total charges were calculated. (We were led astray by a miscommunication). Please re-read! – Monevator
From the archive-ator: Admit it, you miss the market meltdown – Monevator
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
Pension credit reforms set to save government £400m [Search result] – FT
Ofwat’s pushback against water companies could mean cheaper bills – ThisIsMoney
House price growth at near six-year low on Brexit fears… – BBC
…but Northern cities have seen a price boom since referendum – ThisIsMoney
Number of young adults on property ladder plunges by a third in a decade – ThisIsMoney
Italy has slipped into recession – Business Insider
Stock picking is hard: A reminder – The Reformed Broker
Products and services
Lloyds unveils 100% mortgage for first-time buyers – Guardian
Minimum investment in Premium Bonds cut from £100 to £25 – AOL
Ratesetter will give you a free £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter
Grape expectations: How to find the best value wine – Guardian
London Capital & Finance mini-bond investors were promised 8%, now in limbo – ThisIsMoney
Homes for sale in a forest [Gallery] – Guardian
Comment and opinion
The futility of market timing – Albert Bridge Capital
Home bias: A UK perspective – Bunker Riley
One big thing – Of Dollars and Data
Tim Harford: The super-rich are an easy target for tax [Search result] – FT
Investing ability changes with age – Siliverlight Asset Management
Declaration of financial independence? – Fire V London
My investing journey – Young F.I. Guy
Reentry into corporate life – indeedably
Diving deeper into investment trust charges – IT Investor
Social housing – not 100% mortgages – is answer to the housing crisis – SLIS
Should you roll the dice on Games Workshop PLC? – ShareScope
Investing in turnarounds and recovery stocks – UK Value Investor
Brexit
Marina Hyde: Brexit Britain is now the only argument for rising sea levels – Guardian
Brexit puts relocation on the agenda for one in three firms – Reuters
UK manufacturers are stockpiling at the fastest pace in 27 years – BBC
Poorer Brexiters voted to be worse off? There’s nothing wrong in that – Guardian
London plumbing firm besieged by militant Leavers – via Twitter
Gibraltar ‘colony’ row flares as EU makes travel visa-free for Britons – Guardian
Marina Hyde: Brexit enters a state of emergency – Guardian
Kindle book bargains
Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb – £1.99 on Kindle
ReWork: Change the Way You Work Forever by Jason Fried – £1.99 on Kindle
Unscripted: Life, Liberty, and the Pursuit of Entrepreneurship by MJ DeMarco – £0.99 on Kindle
Off our beat
How Martin Lewis became the most trusted man in Britain – Guardian
Why are young people pretending to love work? – New York Times
Chateaux-ed dreams: Turkey’s £151m castle ghost town – Guardian
How to slow down time and live longer – Mr Money Mustache
I’ll pay what they pay: Micropayments vs advertising – Signal vs Noise
Why Britain can’t get enough cocaine – Guardian
And finally…
“Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance.”
– Nassim Nicholas Taleb, Fooled by Randomness
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Comments on this entry are closed.
eke not eek.
There will always be gurus, personalities claiming vision or insight, contrarian commentators offering a better way. Anyway isnt that what you are doing here ? :). Wanting to win, be better, exceed, won’t go away so if the majority use robots or algorithms there will always be a substantial minority refusing to join in.
Business wants to make money. Sustainability, greeness, co2 antagonists and the rest are really just wallet lighteners, cheaper than advertisements and laying claim to some high ground or signaling virtue to confound the cynics.
@MrOptimistic — No doubt, but that’s not quite what we’re talking about here. The point with this is technology will (perhaps) make it as cheap to hold a bunch of stocks (i.e. hundreds, thousands of different companies) directly, which may mean you don’t need a fund at all. It’s not a guru play, it’s a tech play. You would then tilt algorithmically to suit.
@Andy — Cheers, fixed.
I’d be surprised if index investing could even hold a majority given the apathy of most people; even if they have an interest in their financial futures, they’ll still trust a financial advisor. Then there are the true ‘passive’ investors, those who just follow the nudge with their workplace pensions for example, not understanding that there are options, what they are and the pros vs cons. Insurance companies, councils investing funds parked in ‘escrow’ …..trying to have a go with speculative investments to balance the shortfalls on their books – like when taxpayers found out their money had been put in Icelandic banks.
Between this legal sharp practice and genuine incompetence by people who shouldn’t even be in the investment business [councils are an obvious one] as well as amateurs who don’t know what they don’t know, plenty will still fall for the glossy pamphlets & smart-sounding spiel of the managed funds. If managing your own pension becomes the norm, in the same insidious way that we as ‘consumers’ are starting to do part of the job of those we buy services off, [toting up your grocery shopping to replace till operators] there will be a lot of scope to nudge people towards the more expensive options.
“Probability is … the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance.” But there exist lacks of certainty for which probability calculations are no use.
Nit-picking festival: the reformed broker. With a “d”.
@TI but the continued strength of demand for active funds shows that the balance of hope to do better beats ( relatively) small differences in cost doesn’t it? Marketing muscle versus trying to emphasise the long term effect of Delta 0.3% per annum.
Plus, algorithms rely on data. Data is retrospective. Hope anticipates the future. Marketing plays on hope. I shouldn’t declare victory ( or defeat) just yet.
Wouldn’t probability exist – or wouldn’t there be more, or less, probable events in nature – even were there no human, or any other, minds to attempt to quantify it?
If so, the cognitive concepts of acceptance, knowledge and ignorance are not essential corollaries of it.
@PF (7)
“If so, the cognitive concepts of acceptance, knowledge and ignorance are not essential corollaries of it.”
To quote Galileo Galilei – “Nonetheless, it moves.”
@survivor has some valid points about apathy, lethargy and late or no adoption. However, given the increased number of data points about us (our wealth, health, likes, preferences, interests or outlooks etc) and the world (weather, economics, political risk,sensor data, etc) it’s not inconceivable that this data could be used for a tailored investment approach algorithmically determined to reflect our interests or life stage etc. All we would need to do is opt in and feed in the funds. The AI or whatever would do the rest. It would be more refined than the current robo funds that comprise a bunch of ETFs. Time wise, I guess it’s a good few years before we’ll have these types of data infrastructures and interoperable data sources fit for this kind of task. Interesting to think about it.
Interesting discussion. Lethargy and ignorance abound. I increasingly find myself biting my tongue when people talk about their money to me. Starting every sentence with “I am not a financial advisor and this is not financial advice but…” is not my style. I have been asked if my investments are in a “Low, Medium or High risk?” (the conversation stopped there.) I have been told “Oh I didn’t ask him about fees and costs” more than once by intelligent people, I suggested reading the little book of common sense investing but that was a step too far for them. In a town where the buzz at one of our major employers is the size of the pot you can get your paws on from the generous pension scheme, financial advisors are cleaning up! Even at my own workplace, one with a cast iron final salary scheme that would need government to fall to be worthless, people do not even look at their benefits from year to year, several I talk to work far longer than they need to and moan about having to show up – several report to me that they have been cold called about pensions- and let the caller look into them for them. That industry is not going away soon. Robo advisors will probably be another arm of it, fashionable in popular culture and the darling of the press (especially if they advertise there) until the first big wobble and they fall from grace. The underlying stock market return will be little moved by their rise and fall as it is with most industries. The cocaine article was a bit of a wake up call for me, yes it is even on the rise up in the wilds of the British countryside! How big an industry is it that we let the hands of the Albanian mafia control it? @TI, More property porn? Every time that there London booms, it takes ten years for the wave to lap upon the shores of the northern most property prices, by which time by the laws of inverse square, most of the energy is spent. An adept trader in property if they saw such a wave developing in London might surf that wave to the edges of Carlisle if they had the skill and the cahones. Count me out of that subset.
… And briefly, not to take sides on Brexit, a horror movie… https://www.youtube.com/watch?v=M1kP2V3BhWo&feature=youtu.be&t=42&fbclid=IwAR16apNxqIl__A3mPjvzDWc6t4Lz1oPP5gZ1wBprfU1r7Bs_m3Q__bkqmZg
My main issue with ethical funds is defining ethical.
I’m sure any company of any size does unethical things.
Shell invests in green energy, is that ethical? Ethical Bank X doesn’t lend to corrupt regimes, but doesn’t recycle coffee cups. VeganHippiesRUs biodegradable plastic packaging comes from GM potatoes.
Pretty soon you get to the point where no company is investable for everyone, so you’re back to holding individual stocks.
Isn’t there a greater question of where fubds are allocated and who owns them?
I know some older folk in their 60s who are balls deep in btl, enjoy njce final.salaey pensions and have all.money tied up in cash savings or hooses.
They simply don’t trust equities and as a result have no equities at all.
They like to complain about the hassle of their btl portfolio- maybe its.good to have something to complain about when you have all basic needs met. Their portfolio is just for greed.
Investing is frightening – there’s no two ways about it. It is!!
Ethics, by distorting market caps should also create opportunity for value investors (in evil puppy killers inc), ethics may almost become the opposite of value, but the ethical are outnumbered by the unaware and apathetic so it might not be a noticeable distortion
I think it’d be easier to track a portfolio in one fund rather than individual holdings, and people are more likely to leave a fund alone
@ben, I think the point is that an algorithm could personalise your stock picks – your own stock screener if you like, based on values or any other personal investing quirks. Obviously it needs a pretty high quality database from every company, and frankly that would be an issue.
I think the robo element may be some way off but I can very much see the ‘values’ angle being used to justify active management.
@vanguardfan
Perhaps, I just have a hunch that theres a lot of subjectivity.
In my examples above, how would a database help you make a decision?
I don’t doubt ‘ethical’ funds will become more of a thing. I still don’t think they’ve solved that problem.
@matthew.
I’m trying to reason about this. If say 50% of the population were ‘ethical’, buying ethical goods, and ethical investments. The businesses would be as successful at least as the non ethical ones, having 50%+ of the market, the same goes for ethical investments. Surely an unethical investor going for the best investment would go for the unethical fund, and each would tend to balance out? I suppose each group isn’t strictly segregated, but all things being equal they would tend to balance?
On the other hand the ‘best’ 50% of ethical and unethical funds could get the best deals first which would be evenly distributed so leaving more competition for ethical investments? But then ethical investments would only have to focus on half the market, and so would be expected to out perform?
And on the third hand ethical may just be less profitable, or it may be more profitable making the above 2 points moot?
Maybe I’m just reminding myself why I invest in trackers :S
@JimJim thanks for your link to the utube video, very interesting discussion.
@Adrian, I enjoy investing and have done for the past 30 years. What I find frightening is inflation compounded over years turning your hard earned cash into very nearly nothing.
@ben – p/e ratios should be cheaper for unethical stocks, as fewer funds and people are buying them, I didn’t consider which funds can buy more efficiently or do research better but that’s more of an active fund issue – you could simply have a tracker and short the sin stock, or tracker minus sin
As always Marina Hyde posted her latest incandescent Brexit update a couple of hours after I pressed publish:
(Obviously avoid reading if you’re a fan of this game of constitutional Jenga played by drunks over a fire pit.)
https://www.theguardian.com/commentisfree/2019/feb/01/brexit-britain-rising-sea-levels-parliament-uk
Interesting article on games workshop. As a staunch passive investor I’m currently resisting the temptation to pick stocks but there are three atm I’m sorely tempted to dabble in and gw is one and has been for a couple of years . Mostly because a huge number of my mates play and I know how much they spend on little plastic men!
@FBA — I know the products from many years ago and understand the company culture and economics, but I scared myself out of investing 2-3 years ago over fears about 3D printing armies for pennies. It still doesn’t seem to have materialized as a threat; I’m not sure why.
Poop totally hadn’t considered that. And we’re back with vanguard!
Mind you they could use the technology to massively increase their profit margins……
… perhaps, @TI, you could set up an “unethical” virtual portfolio and judge it over time against a basket of ethical funds and a robo-picked ethical investment… That might be fun once a year
@JimJim — I don’t think that would explain much, to be honest. For starters, my ethical/unethical basket would be totally different to yours. Secondly, I claim no edge in picking good unethical stocks. So all we’d discover is a fairly random collection of stocks did or didn’t do better than some funds. 🙂
Alcohol, tobacco, etc suppliers can’t really be blamed for consumers making their free will choice to buy a popular product – people are well aware of the consequences but are free to choose to trade health for a little pleasure, that freedom is core to our democratic type of society. Although where it harms the unborn or asthmatic passive smokers, that’s an offense in my book.
Oil companies also don’t remove people’s option to buy electric cars etc but provide the option to drive for everyone else who can’t afford that and that brings huge knock on economic benefits. Removing the option to use petrol could be called immoral because of the economic pain it’d cause the poor
Arms dealers could be regarded as good because they help bring speedier resolution to conflicts and on the whole strengthen governments
On the whole companies make money because they solve a problem, provide a solution, its profitable because it is good
@TA + @Matthew
Fair points. Is there any unethical stock we could agree was totally dastardly? Blood diamond mines?
@jim – I could argue that some mutuals like nationwide are excuses for unchallenged directors to vote themselves in with no challenge to their remuneration packages
And although some charities do good and have a place, some are clearly less worthy and distract money from better charities or the taxman (which performs some charitable functions) – or from investing in companies that supply stuff to society. Some charities are tax shells so that directors can be paid more, without shareholder interference
And the taxman – as I said does some good, but on the whole is effectively sucking money out of the economy and secondary markets that would otherwise support valuations of any share/bond issues that companies may want to use to grow
Love this blog – and I love the 5 computers quote. Last time I checked I think Tom Watson was a bit of an exaggerator, I can only count 3 computers; Google, Microsoft and Amazon……
@Matthew: “the taxman – as I said does some good, but on the whole is effectively sucking money out of the economy”.
I don’t understand that comment. The government has two routes to sterilise the monetary expansion of Outside Money. First, it can issue bond debt to the private sector. Selling bonds to the private sector the government will successfully take the new Outside Money out of circulation, and replace it with bonds. Second, a government can tax to destroy Outside Money. Taxation is therefore just a form of monetary sterilisation.
If a government just increased the stock of Outside Money exponentially over time without a corresponding sterilisation, then recipients might at some point lack confidence that this Outside Money is a good store of value and seek to turn it into goods/services at higher prices (consumer price inflation), or they could seek to turn it into another currency (currency depreciation) or real assets (asset inflation). So taxation is just a channel by which inflation and currency depreciation can be managed.
@z x – true and I’m pro-inflation because assets and wages grow while mortgages and national debts disappear, in fact I think I once read that Norway made enough from its sovereign wealth fund that the only reason to tax was inflation – I suppose you have to appease cash savers and people get scared, but imho the faster the better.
As well as tax and interest rates, they can also reign in bank reserve ratios…
@Matthew. charities, I always have my doubts. I think charity should be centralised and governed by very few.
The Nationwide? https://www.thisismoney.co.uk/money/news/article-5877469/Is-building-society-boss-REALLY-worth-2-3m-year-Customers-cast-vote.html
Can vote with membership (open an account)
My point was, Surely there are unethical investments. I have struggled with this concept as it does not fit with the scatter-gun approch of indexing. If I index, I de-facto hold some “unethical” shares. As you pointed out in your last post, governance is less reigned in as ETF’s dont have voting rights (imagine the size of the letterbox you would need!)
I bought BHP Billiton some time ago now, a dividend play that has had it’s ups and downs. I was devastated when the iron ore slurry pits broke it’s banks and killed 19 three years ago. I held my position and took a paper loss, it did not feel right to cut and run and I will not until the $5 billion lawsuit is settled. Imagine my horror the other week when an unnamed mine was said on my radio to have done the same thing killing 200+. A lesson not learned is a terrible thing.
We could disagree all day long on taxation but as it is out of my control at this moment I will put my energies elsewhere.
@Fatbritabroad – I’m a Games Workshop shareholder. I bought in mid-2016 because I had read about it somewhere and it was cheap on a free cashflow basis (yielding c10%).
Despite the recent pullback from £40, its still not that cheap and profit growth has slowed in the latest half year. The boost in sales and profits from the simplified Age of Sigmar range feels like it could be tailing off. Games Workshop has had a great run in recent years so on the back of the latest half year it wouldn’t surprise me if the next few sets of results disappoint.
So then why am I not selling? Well, it’s still a great stock with a unique franchise including decent intellectual property and a sticky customer base, with room to grow geographically. As the former chairman is reputed to have said, the greatest threat to the business is girlfriends.
And I have taken some chips off the table at £14 and then at £35 but still have two-thirds of my original stake. I think there will be a decent time (and valuation) to reload in future – my sense is that now is not it.