Financial Times article: Alarm bells ring for active fund managers

A week after The Economist announced the “Death of the fund manager” on its front page, Monday’s Financial Times followed up with an article confirming that “the tide is gradually turning against active management, as pension funds start shifting to passive funds in order to keep costs down.

The UK Centre of Policy Studies calls the move a “win-win for tax payers and employees”. Below are key excerpts and further quotes from the FT article.

  • Alarm bells are ringing for active fund managers after the UK government last week proposed that almost half of the £179bn of assets controlled by local authority pension funds should be switched to passive index trackers to slash costs. This would save the pension schemes £420m a year in investment fees and transaction charges.
  • “This is further vindication that the right way to run money is to get the portfolio allocation right and then keep costs as low as possible.” Gary Mairs, partner at TCF Investments.
  • John Ralfe, an independent pensions consultant, believes the shift will save trustees “time and effort, as well as money”.
  • “There is an entire industry geared to active manager selection and monitoring, which is just a waste of time and money.” Johan Ralfe.
  • Last year, the largest US public pension fund, Calpers, said it would use index-tracking strategies where there was no demonstrable evidence that active management could add value. Two-thirds of its public equity portfolio is passively managed.
  • Other US public pension plans have been urged to follow suit. A 2013 study by two think-tanks based in Maryland suggested US state pension funds could save $6bn a year in fees if they moved most of their portfolios to index funds.
  • The study also found that paying higher fees led to poorer investment performance. Over five years to the end of June 2013, the 10 state pension funds that paid the highest fees (61 basis points on average) registered annualised net returns of 1.3 percent while the 10 funds that paid the least (39bp on average) returned 2.4 percent.
  • Jeff Hooke, chairman of the Maryland Tax Education Foundation, urges state pension funds to consider indexing as a more responsible use of resources rather than paying billions of dollars to Wall Street managers for sub-par results.
  • Academics at the Paul Woolley Centre at Sydney’s University of Technology surveyed Australian pension funds and consultants to understand why active management continues to be favoured. Their findings suggest consultants have a tendency to promote active management as they see passive management as bad for their own business model.
  • It was an actuarial consultancy, Hymans Robertson that advised LGPS on the potential cost savings of passive management. Citing other international studies, they concluded that improved performance generated by “active investment managers [relative to passively invested benchmark indices] is, on average, insufficient to overcome the additional costs of active management”.
  • Hymans Robertson also highlighted the higher turnover costs associated with active management. The cost of trading reduces investment returns. So-called passive managers generally engage in minimal trading.

As always, we look forward to your thoughts and comments.

View the full Financial Times article Alarm bells ring for active fund managers on their website (please note that member registration is required).

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