I read an article in the January 31 edition of the Business Daily that touched on management fees and unit trusts and noted a few issues that interest me as an investment professional.
The writer introduced an important topic on collective investment funds (CIFs), but deflated the discourse by erroneously reducing a great and valuable industry to fees, yet we know that in a free market environment the price or fees paid for goods and services is based on the derived value or utility, perceived or real.
Inasmuch as access to information to enable investors make informed decisions is imperative, there is no gainsaying that as professionals it behooves us to share correct information that adds value to our readers, otherwise investors may settle on sub-optimal decisions based on our expert advice.
Perhaps unknowingly, the writer made a sweeping statement to the world that investment management industry, which dates back to 1700s Europe, has been collecting fees from hapless investors for centuries for services without receiving any value in return. In fact, managers have been value destroyers leaving the investors worse off than had they invested on their own.
I highly doubt that today’s very knowledgeable investor would be gullible to continue pouring in billions of hard-earned dollars into mutual funds or unit trusts.
On the contrary, funds continue to flow into investment companies precisely because of tangible benefits accruing to investors, including investment and withdrawal convenience; that is, liquidity.
Silent enabler of above average, inflation-beating returns is found in management fees given that investment firms must demonstrate ability to add value to their clients’ portfolios.
After all, an investor can quickly vote with his feet and move investment to another manager as seen elsewhere in this article.
Yes, we may be tempted to reason that we do not need banks since we can safely keep our cash in our homes. After all, bank charges have been a big burden for the mwananchi for eons gone by.
Beyond delivering market returns to investors, investment industry has played a key role in the growth of leading global economies by supporting and helping to deepen respective capital markets through participation in initial public offerings (IPOs), other primary offerings, including government securities programmes, private placements, and later in secondary markets trading.
According to the Deloitte Investment Outlook 2018, approximately 96 million individuals invest in mutual funds (representing 44.4 per cent of US households) and hold $18.8 trillion in mutual funds and exchange traded funds (ETF) assets, which is more than the US GDP.
Total assets in regulated open-end funds globally were also near an all-time high at $40.4 trillion in 2016, growing at a compounded annual growth rate of 7.7 per cent over the last five years.
Perhaps a better conversation is one that compares actively managed and passively managed CIFs. The Deloitte report further proffers that most investors in the United States are migrating to lower-cost funds where market shares of front-end and back-end load funds have declined in recent years, while the no-load funds have increased substantially.
Part of the shift to low-cost funds is linked to the shift from active to passive investing (investment in index portfolios such as S& P 500, Dow Jones, and MSCI indices).
There is all likelihood that investors will shift a certain portion of their portfolios to passive funds and retain significant investments with existing active managers, even as deployment of technology platforms, which enables active managers to distribute investment products more efficiently, lead to reduction in front-load fees, hence overall fee structure, for the Investor.
I hold the view that portfolio managers will continue to outperform individuals managing their own investments primarily on three major fronts: 1) access to well-trained, disciplined investment professionals; 2) the pooling power inherent in retail investors investing together, which enables managers to invest in a diversified basket of large ticket investments (large IPOs, corporate bonds, government securities, listed private equity funds, structured notes, commercial paper, etcetera) on behalf of investors of modest means; and 3) better research and technological tools used by investment managers in quest for ‘Alpha’.
Lincoln Njenga is a financial advisor.