long-only funds v ucits 3 funds
TRANSCRIPT
Long-only funds v UCITS 3 funds
Chair: Alastair BarrieSales Director, Henderson Global Investors
Tim Hale, Managing Director, Albion Strategic Consulting
Tony Stenning, Managing Director, Unit Trust Business, Blackrock UK Retail Group
© Albion Strategic Consulting 2008
Long only funds v UCITS III(Passive long only vs. less constrained active management)
PFS – 11th November 2008
Tim HaleManaging Director
Albion Strategic Consulting
© Albion Strategic Consulting 2008© Albion Strategic Consulting 2008
What are we really talking about here?
A fundamental issue…
Does active managementwork?
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YES
UCITS IIIUnfettered scope•Shorting•Derivatives•Leverage
NO
UCITS IIIMore rope•Overcomplicated•More risk to manage•Skills required•Marketing driven•Bad for investors
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The false triumph of hope over reason
The tyranny of function…
Mr Active Manager
Active managers can hold cash in falling markets,
go short etc.
Indexing creates inefficiencies to be
exploited
Why accept certain failure, when you can beat the
markets?
You don’t want all that rubbish in
your portfolio!
Active managers win in inefficient markets
Index fund success is self-fulfilling
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The challenges of active management
It’s not easy being an active manager
• An exceptional talent pool
• Markets are hard to forecast (efficient)
• They move quickly and with magnitude
• Active management is a zero-sum game
• After costs it is a loser’s game (by 2% to 3%)
• Alpha is often beta
• The evidence against it is compelling
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Markets are hard to forecast
Trying to time markets is a fool’s errand
– Little evidence of success– Only around 1.5% of UK equity fund managers exhibit skill-based success*
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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20071992
Emerging Market
UK Equity Market
UK Gilts
Int'l. Equity
Cash
UK Comm. Property
2008
?
?
?
?
?
?
Speculating
Emerging Market
UK Equity Market
Int'l. Equity
UK Comm. Property
UK Gilts
Cash
Long term
Investing
Data source: DFA Returns program, except UK property = IPD to 2006 and iShares UK property ETF returns 2007*Cuthbertson, Keith, Nitzsche, Dirk and O'Sullivan, Niall, "The Market Timing Ability of UK Equity Mutual Funds" (November 2006).
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Success is not a question of market efficiency
Passive investment works in inefficient markets too– Percentage of active funds beaten by the index over 5 years (to Q1 2007)*
7277 78 82
72
8592
7281 83
61
0
25
50
75
100
* Standard & Poor’s – SPIVA Report
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You do the maths
Estimates of index fund out-performance of active management*– Monte Carlo analysis
• Assumes active costs of 2% (generous) and tracking error of 7% • Passive fund costs of 0.5% with 2% tracking error
* Analysis: Albion Strategic Consulting
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Skilful or lucky?
Skill or luck*- ‘added-value’ is similar to randomness less costs!
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* Carhart, Mark, (1997), On persistence in Mutual Funds, Journal of Finance (study of 1,302 US mutual funds)
Random bell curveManager alpha
frequency
Statistical significance
Bad managerspersist
Very few goodmanagers persist
Return vs.market
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The evidence is compelling
The solution is obvious…
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Skill-based, persistent winners to 2005*
US equity fund managers (355) in 1970*
*John C. Bogle (2007), The Little Book of Common Sense Investing, John Wiley & Sons
“Don’t look for the needle,
buy the haystack!”John Bogle
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The evidence is compelling
The solution is obvious…
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Skill-basedWinners*
*At 95% confidence level, excluding ‘false positives’.Cuthbertson, Keith, Nitzsche, Dirk and O'Sullivan, Niall,F alse Discoveries: Winners and Losers in Mutual Fund Performance(January 2008). Available at SSRN: http://ssrn.com/abstract=1093624
UK fund managers (675)
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Picking and staying with managers
It is hard to run an active program
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Skill or luck?
Manager turnover costs
Underperformance decisions
Costs of decisions
Long-term client benefit?
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Conclusion on UCITs III
The hype fails to be matched by the evidence…
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And finally – a thought to take away…
“Remember, we’re geeky smart guys who feel a sense of duty to protect grandma’s retirement money.
We’re not big on risk.
But we do quietly revel in the security that beneath our taped glasses we are quietly spanking everyone else’s portfolio.
Fast cars and hot models are not for us. Get over it.
We’re about wood-panelled station wagons and a nice, wholesome family that is secure and certain. Like our retirement, and the retirement account of our investors”
Jason Wiandt’s advice to the index fund industry 2007
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Albion Strategic Consulting
“Leaders in helping dynamic, owner-managed wealth management firms to build ground-breaking businesses”.
Contact detailsTim HaleManaging DirectorAlbion Strategic Consulting5 Charlotte MewsExeterEX2 4HA
(T): +44 1392 494141(M): + 44 7974 253604
(E): [email protected](W): www.albionstrategic.com
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Risk warningThis is a purely educational presentation to discuss some general investment related issues. It does not in any way shape or form constitute investment advice.
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