Do active managers deliver the best returns? The computer says no

Global Outlook

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The Independent Online

The investment management industry is in its death throes. At least according to new research published by State Street, erm, a Wall Street investment management group. Honesty on Wall Street? What madness is this?

But State Street isn’t telling anybody anything they don’t already know – only what most choose to ignore. This being that despite high fees and very smart people, active fund management – stock picking by a human being, rather than the tracking of an index by a computer – almost always fails to deliver results. Passive, low-cost fund management by computer is almost always superior. By continuing to recommend actively managed funds, money managers behave like deer at a salt lick. No matter how many times they see their buddies getting blown away, they can’t resist coming back for more.

State Street, a Wall Street staple since 1792, is not normally so maverick. Its research, entitled “The Folklore of Finance: How Beliefs and Behaviors Sabotage Success in the Investment Management Industry”, suggests that the industry is broken because investors are displaying distrust, dissatisfaction and disintermediation – whatever that means. Do it yourself, I think.

Obviously State Street’s research doesn’t conclude that everyone should take their money out of actively managed funds and put it into passively managed, low-fee tracker funds. That would be too honest. Rather, it suggests that the industry itself must create a “new Folklore of Finance”, in which everything will be wonderful and fund managers will suddenly be worth their exorbitant fees.

Of course, it’s the fees that are often responsible for the poor performance, yet they keep the industry chugging along at the same time. If someone is charging big fees, they must be awfully clever, surely? The higher the fees, the more esoteric the fund, the more money managers like them. Makes them look clever too. And of course, a tracker fund run by a computer isn’t going to get you tickets to the Masters.

Which brings us on to the subject of Bill Gross, until recently a managing director at the bond fund giant Pimco. According to Bloomberg, he was paid $290m (£185m) in 2013 prior to handing in his notice. Pimco’s slightly pathetic denial of the number only served to reinforce the perception that Bloomberg’s analysis might not have been spot-on but was certainly in the ballpark.

It’s hard to pick gaping holes in Mr Gross’s long-term record, which is undeniably good, but Pimco’s performance over the last few years – and by default Mr Gross’s – has been somewhat anaemic to put it politely. And yet investors not only put up with it but encourage it. The cult of the financial guru is every bit as powerful as the cult of the religious guru. Mr Gross is on his way to Janus Capital Management, a move that is seen as something of a coup for the much-smaller investment manager.

Why is it a coup? It’s like signing a 40-year-old centre forward whose glory days were a generation ago. Maybe there is a bit of the old magic left in him, and he has already been followed to Janus by another veteran, George Soros, whose hedge fund has given him $500m to manage. But as State Street’s research reveals, and it is just the latest example, most human fund managers don’t have that magic to begin with and ever fewer get it back once it’s gone.

Financial advice is important. It’s not a “you can do it all yourself” business, and the world is full of good advisers who can help people create and implement long-term plans for their family’s financial well-being. But State Street confirms that the odds of finding a fund manager who will beat the market over the long term are approximately one in two hundred.

Those are odds that even the worst human fund manager should baulk at.

Watch out, Halliburton, BP could be coming after you

 The oil and support services group Halliburton is on the M&A hunt, agreeing to shell out almost $35bn for Baker Hughes, another company that supplies services to the oil industry. Business as usual for Halliburton, despite the absence of those tasty, “non-compete” Iraq contracts.

The markets don’t appear that keen, given the sharp drop in Halliburton’s share price. This is mainly due to regulatory concerns that might force it to divest several decent subsidiaries. Cue the usual sector consolidation rumours in America, with several analysts suggesting that smaller oil service stocks could be in play for a bid.

However, you can bet that one company won’t be involved in any deal making – BP.

Due to the 2010 Deepwater Horizon spill in the Gulf of Mexico, BP remains the company America loves to hate – a pariah facing endless claims that will probably run into billions of dollars on top of what it has already coughed up. Well, when you think you’ve got a bottomless piggy bank to raid, why stop?

The persecution of BP in the US is disgraceful. It has not avoided responsibility or reparations – BP has accepted the former and paid the latter, on a scale that no company, oil producer or otherwise, has done before.

Our own politicians have offered BP pretty meagre back-up, at least publicly. David Cameron has had ample opportunity to voice his support, but outside September’s amicus brief filed with the US Supreme Court, the silence has been deafening, at least recently.

Can you imagine if it was Total that was being treated like this? Probably not, because the French wouldn’t stand for it.

So Halliburton, which has paid $1.1bn to settle claims stemming from the Deepwater spill out of court, against the $28bn and rising that BP has forked out, should spend its money while it still can. My bet is that at some point BP is going to go after Halliburton, and the amounts involved might make the Baker Hughes deal look a bargain.

Full disclosure: Andrew Dewson’s father is a former employee of BP.

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