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Exchange traded products – everyone wants a piece of this pie.
Exchange traded funds started as an investment management product. They were run by investment managers, who had to build scale in order to make any money out of them.
Then the European regulations allowed funds to use swaps and investment bankers realised there was an opportunity to use their skills. Lyxor, an offshoot of Societe Generale, but not its asset manager, and db x-trackers set out to promote their synthetically replicated ETFs, but still claimed they were offering investment management.
Despite the academic hours put into debating whether active fund managers outperform, no one has definitively won the argument it seems.
The debate has been fuelled recently by papers from Eugene Fama and Kenneth French (Luck versus Skill in the Cross Section of Mutual Fund α Estimates) and Laurent Barrat, O. Scaillet and Russ Wermers ( False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas).
Most days I can rely on a communication from some investment consultant or other landing in my inbox bemoaning something about pensions.
Today it is Hewitt Associates, which quotes some nice round figures about the danger of 15,000 people in the UK losing at least 20 per cent of their pension benefits if trustees of defined benefit schemes do not “take control of investment strategy”. It says £150m of pension benefits are at risk over the next two years.
The challenge of setting up independent pension trustee boards is an uphill task.
Any hopes of making progress were dashed today, reading the latest findings from Trustee GAAPS. Only one third of pension trustee boards of FTSE 100 companies are independent, according to the trustee search firm.
Fund managers are in the unhappy position of being able to see the oncoming train but unable to move because their hands are tied. Even though they think climate change is a source of investment risk, their short-sighted clients are not letting them do anything about it.
According to research by FairPensions, nearly 90 per cent of fund managers think climate change is an investment issue, but feel they can’t do anything because of short-term analysis and lack of demand from pension funds.
Bedlam Asset Management is worried about ETFs. Our colleagues on FT Alphaville have already noted their concerns so I won’t go into detail. Suffice to say that Bedlam thinks parallels can be drawn between the evolution of ETFs from simple low cost product to complex sophisticated product with hidden costs and the expansion of securitisation that eventually led to the sub prime debacle.
Bedlam is an active manager so doesn’t use ETFs. But the possibility of a fraudulent operation being discovered and causing a run on gold, for example, as people sell out in a panic would have wide repurcussions. So it is alerting the market to this possibility.
The prospect of living in poverty or at least in tightened circumstances in old age is not daunting British workers.
One in three people currently at work plan to rely on whatever the state provides when they retire, according to research carried out for Baring Asset Management.
Hedge fund managers are often castigated for their high fees, while even traditional fund managers do not seem to think there is any advantage to offering lower-priced products than their neighbours. Although overcharging is never to be condoned, however, it may be in some cases that the consumer is simply not paying attention to what they are paying for their services.
This week I met some representatives from French independent asset manager Financiére de l’Echiquier, who conveyed a sense of their company as one that ticks all sorts of boxes as consistent, stable, responsible and a good employer.
This disarmed me slightly as I had planned to go in all guns blazing to attack them for what I thought were unconscionably high fund fees of 2.392 per cent a year. That’s fees alone – for comparison, in the UK, the average total expense ratio (fees plus expenses) is 1.7 per cent.
When I finally challenged them, instead of whipping off their friendly masks to reveal the evilly grinning features of Mammon-worshippers grinding the faces of the poor, they looked a bit surprised.
“But those fees are pretty much in line with the average,” was the response, followed by a thoughtful pause. “Do you know, that is the very first time anyone has ever asked about our fees.”
That is after all how capitalism works. You charge as high a price as the market will bear and the European fund market will still bear very high prices.