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Blog: Don’t join ‘em, beat ‘em; cutting out the asset manager

Written by: Phil Oakley, investment analyst, ShareScope
If you’re new to investment, it's easy to think that you can’t compete with professional fund managers, and are surely better off investing your money in their funds, leaving them make the decision. The only problem is, this assumes that professional fund managers are good at their jobs.

There are of course some outstanding managers out there, running high-performing funds and investment trusts. Unfortunately, there are far more managers who aren’t outstanding, and aren’t doing very well. Many, in fact, do a worse job than computerised tracker funds, which emulate the performance of the FTSE All-Share. Like most of the world’s stock markets, the UK’s has been on a stellar run during the last five years, especially the shares of smaller and medium sized companies. In fact, the iShares FTSE 250 exchange traded fund (a passive fund that tracks a basket of medium sized companies) has grown by 98.2 per cent – only 27 active funds beat that.

However, in many cases, fund managers don’t perform poorly due to dishonesty or incompetency. In fact, most bad performance comes down to a fundamental underlying flaw at the heart of the fund management industry – fund managers work to serve themselves first, rather than their customers.

Fund management companies exist to make money for their owners. Fund managers make money by charging customers a fee for looking after their money; usually, a percentage of the customer’s investment account – the bigger its value, the bigger the fee. Fund managers know that their income – and their job – is dependent on their customers staying with them, and not switching their money to another manager. The easiest way for customers to leave is for the fund manager to underperform the stock market they are trying to beat.

In order to avoid this, many fund managers will buy what the herd is buying – thus, if they fail, then they’re not alone. This is a lot better for their job security than straying from the herd by picking a cheap share that takes time to pay off and may lead the manager to underperform the market in the short-term.

On top of these issues, there is the problem of high fees. When advisory and platform fees are included, the average active fund might end up costing as much as 2.25 per cent annually; while this may seem insignificant, these fees can add up and eat away at your savings pot over the years, meaning you end up a lot worse off in the future than you should have done. Manager fees have been coming down in recent years, but they are still too high. The other problem for customers is that fees are not clear; very few funds will tell you how much their activities actually cost you, and what you’re paying for – the costs of buying and selling shares (commissions, the difference between the buying and selling price of shares and stamp duty) have historically rarely been included, though there are regulatory moves to ensure these costs are made clear.

At ShareScope, we believe the answer to these quandaries is to become your own fund manager, and take control of your own portfolio. That’s why we created SharePad.

If you take control of your own portfolio, you don’t have to engage in these silly games. You shouldn’t even be overly concerned about beating the stock market, and you don’t need to own dozens or hundreds of different shares. Your focus should be on using a share portfolio to grow the buying power of your money, so that it will buy more things for you in the future than it will today, by investing in good companies at attractive prices.

On your own, you are also free to invest in any company. Professional analysts may not even bother researching companies below a certain size – but there can be great opportunities for investors within this sector of the market. Because many smaller companies are ignored, you have a chance to find exciting growth companies before they get onto the professional radar of the professionals.

Furthermore, you can move your money into cash any time you like. If you think stock markets in general, or a particular market like bonds, are heading for a big fall you can sell your investments and buy back in when prices are much cheaper. Many fund managers have to stay fully invested in shares even if they think valuations are too high.

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