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Between 1985 and 2005 the average equity fund underperformed the S& P 500 index by 1.4% per year in the United States. Internationally, over half that period in the 10 years from 1995, it is calculated that 69% of active funds underperformed against the MSCI World index.
In Europe, where arguably markets are more efficient, which means delivering market-beating performance is that much harder, most fund managers failed to pass the test. It was found that 86% lagged the MSCI Europe index. In emerging markets, 76 % of active funds underperformed in the five years to the end of 2005 when measured against the relevant MSCI index.
These figures are drawn from a presentation delivered by Anders Lindell, an executive vice-president with IPM (Informed Portfolio Management), delivered at a seminar on exchange-traded funds organised by the London Stock Exchange last month.
People may question the detail of the figures or the size of the sample - WM, for example, does a similar analysis which comes out with slightly different results. But there is no disputing the overall conclusion. More often than not, active management fails to deliver. The vast majority of people would be better off in tracker funds because they are not only much cheaper, they also preserve capital better.
This is not the only reason for the stress showing through in the fund-management industry, but it is part of it. Active fund management has not delivered what it says on the tin, in spite of charging high fees for making the attempt, so the customers are pulling their money out.
Falling markets always have that effect to some extent, but if the experience had been more gratifying in the good times there might be more willingness among the customers to give the industry the benefit of the doubt when it gets difficult. Instead, the withdrawal of funds, combined with the fall in value of the funds under management caused by the drop in the markets as a whole, leads to a significant reduction in the pool of money on which charges are levied. So the income of fund-management groups plummets.
People are the major cost so Fidelity, one of the world's biggest active management groups, has announced significant job cuts. A combination of disappointing performance and high levels of debt have prompted John Duffield to take drastic action at New Star, and these are just the more high-profile cases.
There is retrenchment across much of the industry. It would be no surprise if some of the fund-management groups which were subject to highly-leveraged buyouts at the top of the market soon join the others in the rush to cut costs.
What we do not know at the moment is whether or not the active-fund-management business model is irretrievably broken. Certainly the client mood has switched to the pursuit of absolute rather than relative returns, which makes them much more willing to invest through low-cost trackers or exchange-traded funds. Also it is only to be expected that an industry which had become closely associated with investment banking would find the pain in that sector moving through, with consequent pressures on the food chains and fee structures.
The real issue, though, is how long the market turmoil can be expected to continue. If the worst predictions of stagnant economic growth and strong deflationary pressures prove even half right, then the existence of a large number of active-fund-management groups will be called into question.
They cannot really complain. They have got away for a very long time with failing to give their customers what they want.
Strange tale of an FSA resfusal
If a company says it is in talks with its bankers, then it is hard to see how the market can put a fair value on the shares. If the bankers force the company into receivership then the shares are most likely worthless. If the bankers agree to a debt-for-equity swap then the value of the shares depends on the amount of debt swapped and on what terms. If the bankers agree to relax the covenants and not press for their money then the shares are probably worth more than they were to start with. The point is there is not enough information to judge what is a reasonable price.
The obvious thing to do in such circumstances is to suspend trading in the shares until the outcome of the talks is clarified. Then people can decide reasonably what the shares are worth.
In a very strange decision the Financial Services Authority refused to suspend trading in New Star yesterday. Thus the shares were free to plunge from 14p to 6p on a wave of professional selling. How the interests of private investors in New Star have been protected by the refusal to suspend is a mystery - and if the FSA is not there to protect private investors whose job is it?
