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The staggering way The City overcharges investors in active funds

You may have already seen the first part of the upcoming 10-part documentary on passive investing by Sensible Investing, as I featured it in Saturday’s Weekend Reading.

I think the rest of this series looks very promising. There’s a roster of high quality interviewees to come and the videos make the case for index funds versus active fund management in a down-to-earth fashion.

So I’ve decided to run all the videos as they appear here on Monevator.

You’ll find part one in the video series – entitled How to Win the Loser’s Game – below. Please note that if you’re reading via email you may need to visit Monevator to see the video.

Perhaps the killer line in this video is the revelation that one single fund manager was paid £17.5 million in 2013.

That’s 600 times the average UK salary!

Of course the high costs spread far wider than just one person. Indeed, at one fund management company surveyed, the average salary was a cool £436,000.

As Lars Kroijer – himself a former hedge fund manager – has previously revealed on Monevator, paying for the high costs of active management hugely reduces just how much the typical investor in active funds will earn over their investing lifetime.

Given the evidence that the average active fund fails to beat the UK market, you must really like fund managers if you want to keep them in sports cars and Mock Tudor mansions at the expense of your own retirement!

Oh, and in case you’re wondering, the title of the video refers to a famous article on the poor odds of active fund management written by Charles D. Ellis in 1975, which he’s updated in his recent book, Winning the Loser’s Game.

Check out the rest of the videos in this series so far.

{ 13 comments… add one }
  • 1 EarlyRetirementGuy September 1, 2014, 1:53 pm

    So why do the masses continue to place their faith into a stranger instead of basic statistics? Is the default company pension fund choice to blame?

  • 2 Dave Liddle September 1, 2014, 3:35 pm

    All financial investments are gobbledy gook to a great many people. They wont understand statistics either. So buy a fund instead of risky shares. Colourful brochures will tempt many. We always thought banking was an honourable institution not the rotten barrel we keep making more discoveries about

  • 3 dearieme September 2, 2014, 12:06 am

    I’m persuaded of the merits of passive investment for big companies in developed markets. How about the other cases?

  • 4 Edmund Blackadder September 2, 2014, 8:26 am

    Some excellent videos on their website – and it’s nice to put voices to so many of those names and faces.

    I’ve only been at the investing game for 11 months. I feel I have built the foundations a nicely diversified portfolio that I can build on over time. It’s interesting that of my 10 funds, the only two which have lost me money are the two active funds (in my defence, one of them was one of the first I looked at and the other specialises in Russia, but hey ho).

  • 5 N September 2, 2014, 9:54 am

    I see the active fund management fee as the price paid to take on additional risk to increase the loss/gain.

    Another way to increase the risk is to simply put more money into a passive fund. Borrow this money for even more risk.

    Which is better ?

  • 6 Epiktet September 2, 2014, 11:11 am

    There are still many individual investors out there who belive that they can outsmart the market by picking 20-30 individual stocks. The number of blogs on dividend investing or similar strategies is growing rapidly.

    That is great news to index investors, because it will help to keep the markets efficient.

    Today, I can buy an index tracker matching the S&P 500 with an TER of 0.09% (= 9 GBP per 10,000 investment). So why bother? If I want to be clever, I can set up a regular savings plan and buy low as well as high.

    I rather use my free time for other things than digging through annual reports etc.

  • 7 Louise @ Good Financial Choices September 2, 2014, 12:24 pm

    “you must really like fund managers if you want to keep them in sports cars and Mock Tudor mansions at the expense of your own retirement!”

    Love this quote, it really hits home for me and makes me glad I’m now in the low cost index trackers world.

  • 8 Tobesurf September 2, 2014, 2:05 pm

    A great programme but I have to say – “Well, duh!! Is this really anything new?!”

    I think a lot of it is down to the default position of pension providers (including employers with defined schemes) to invest with these funds because they present it as the “sensible” thing to do.

    I am lucky enough to have a defined pension scheme provided by my employer but, whilst that in itself is pretty good, when I asked if I could instead just receive my employer’s (very generous) contribution so I could invest it myself into my S&S NISA and SIPP, my request was met with absolute incredulity by my employer’s scheme “manager”. She’s apparently been working as a pensions advisor to our staff for 20 odd years and has never once had someone ask her for this. Another example of so-called “experts” being brainwashed by the marketing and spin put on funds and pension schemes so that they give, what I actually believe to be, very poor and bad advice.

    Whatever happens, I shall continue to run my personal investment portfolio which continues to provide a well-above market return due in the main to me being absolutely ruthless with costs.

    It sure as heck won’t be me asking where my yacht is when I come to retire!

  • 9 weenie September 2, 2014, 3:30 pm

    @ Tobesurf

    No it’s not new but whilst I knew fund managers earned a lot of money, the salary figures quoted are just unbelievable!

    I’ve switched a lot of my funds into trackers now, still have a couple that I’ll keep an eye on, including a small amount in Neil Woodford’s fund – he could be one of the few managers who has some skill in investing!

    I have no idea how my company defined benefit pension is invested – I think I’ll ask the question, so thanks for giving me the idea!

  • 10 helfordpirate September 2, 2014, 3:43 pm

    @N “I see the active fund management fee as the price paid to take on additional risk to increase the loss/gain.”

    The problem is you are taking on more risk but with a lower average expected return. Yes, the universe of possible outcomes now includes some potential outperformance (which it clearly doesn’t or shouldn’t with a tracker); but the average return must be mathematically the market return less the substantial costs.

    Why would you take more risk for an expected lower return?
    Only if you a) felt you could pick the active funds that will win b) you felt lucky!

    The way to take more risk with a higher expected return would conventionally be tilting to small and value – though some question whether that risk-adjusted advantage still exists.

  • 11 Hamzah September 2, 2014, 3:55 pm

    @ Tobesurf

    I’m not surprised at the reaction to your request. Funding a defined benefit pension is not really something you need to worry about other than the terms and conditions of calculation of the final payment. How the company chooses to fund it (and what protections are in place) are the concern of the company more than yours. It is the unfortunate employees who get moved from defined benefit to defined contribution schemes who need to be more concerned about where funds are invested.

  • 12 Dave Liddle September 2, 2014, 3:59 pm

    my biggest wonder now that I’m retired
    my original co pension was non contributary and payed out in 1/80
    so I would get 40/80 or 3/6 at retirement. It changed to contributary paying 60ths.
    So 40/60 0r 4/6s an extra 1/6 for my years of contributions
    I have always wondered could I have stayed non contributary and what would I have amassed with my contribution invested privately and passively while remaining untouched,

  • 13 N September 2, 2014, 4:51 pm

    “The problem is you are taking on more risk but with a lower average expected return.”

    I think this will always be the case – taking on additional risk lowers the expected return, unless you just invest more hard earned cash in a passive fund.

    that said, I’m firmly in the passive camp and prefer to take on risk by borrowing money to invest.

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