Last month, over lunch between shows at the Edinburgh Festival and well into our table’s second bottle of rosé, I gave a friend a list of the things that make a good fund manager (never let it be said that I don’t get out much). There was one thing on the list that he thought was particularly brilliant. But later he forgot what it was, and sent me an email asking me to recall.
I’ve been trying to remember ever since. Was it having an all-inclusive fee – one that incorporated even trading costs? An annual meeting to which all individual investors are invited? A concentrated, high-conviction portfolio? A stepped fee (falling as the fund rises in size)?
Is it a clear investing style (one that does not change constantly)? Skin in the game? Or an understanding of the long-term role of the fund manager as a steward of the corporate world and by extrapolation of national social cohesion?
Could it have been having an active share of over 90% (this just means it doesn’t track an index)? Or a willingness to turn up at AGMs and vote down silly pay packages (even if it turns attention on to fund managers’ pay)?
We haven’t remembered the final piece of brilliance yet, but in the making of the list we have agreed that it is increasingly odd that the industry seems to make something that seems so simple (if not easy) from the outside so insanely complicated. Why not run a cheap fund concentrated with conviction and an eye on the social implications of corporate behaviour? How hard can it be?
On the plus side, in the heart of its quite dark heart, the industry knows it isn’t good enough – which is why you will notice two of its heavyweights striking out alone this week. You would have thought that having co-founded Hargreaves Lansdown, made a proper fortune and stepped out of the limelight (bar a little well-justified Brexiteering) Peter Hargreaves would have found it pretty easy to find a suitable home for all his cash. (There are, after all, more than 2,500 funds listed on the Hargreaves Lansdown website alone). Not so.
This week, along with fund manager Stephen Yiu, he has started marketing a fund that will manage a “substantial portion” of his own wealth, the CF Blue Whale Growth Fund (the offer period starts on September 11). It will have a concentrated portfolio of 25-35 global stocks chosen without reference to any particular index; an annual management charge of 1% (1.24% all in); and initial focus on investing in the US.
British investors, Hargreaves tells me, are pathetically parochial in their investing. We always think the US is too expensive and have therefore “missed every US boom in history”. Where you and I see insane prices driven to embarrassing levels by bad monetary policy, he sees value in individual stocks. I have a certain amount of exposure to the US via my Sipp at Netwealth (it is passively run) but regular readers will know I have been (wrongly) worrying about the market being expensive for far too long.
With that in mind, perhaps a long-term conviction portfolio of well-priced growth stocks is the insurance I need against persistent wrongness, particularly given that Hargreaves promises to produce a blog in which Yiu will be explaining all his purchases to investors. I’ll be watching it.
It is worth noting, by the way, that Hargreaves is completely right on the international point. Investors in UK markets have hefty international exposure via our excellent exporters, but we tend not to invest directly – and that leaves us under-diversified.
Some investors, at least, understand this. At last week’s FT Weekend Festival some of the best questions in my session were about investing in India, China and the US. If your bias is towards the former two (these aren’t cheap either, by the way – both the Indian and Chinese markets have doubled in the last five years) you might make sure you hold money in one of the better emerging-market trusts, some of which currently trade on wide discounts to their net asset value (see below).
Analysts at Stifel point out that they are trading on unusually high discounts. Look at the Templeton Emerging Markets Investment Trust for example: it has returned 35% over the past year but still trades on a discount to its net asset value of 11%. I’d also look at the relatively high-risk Fidelity China Special Situations (which I hold in my Isa), trading on a 11% discount.
That brings us to our second fund, also an investment trust. The People’s Trust is being launched by Daniel Godfrey, ex-head of the Investment Association and hence a man with firmer views than most on how the business should work. It’s global; it is starting off rather too expensive (over 1%) but he is aiming to make it low cost (cutting fees as it grows); and the money will be run by high-conviction managers who will be charged not just with making money but also with choosing companies that “innovate, invest in their people, pay their taxes, and protect the environment”.
Check that against the list at the top of this page and you will get a lot of ticks. However, Godfrey’s key obsession is time. Most fund managers are semi-hysterical about their relationship with whatever index they have chosen to be judged against. This makes sense in a business context: if they say they will beat it and they do not, why shouldn’t they lose customers?
But it makes no investing sense: if you can’t look an investment in a five-year context you aren’t investing, you are speculating. So the five fund management firms among which Godfrey intends to divide his investors’ cash are being put on seven-year contracts. No one running money for the trust will have to worry about the short term (for six and a half years at least).
Neither of these funds will be perfect. Until they grow, their costs will be too high to make me happy and you could argue that neither of them offers a dramatic enough difference to the status quo to challenge the industry as it needs challenging. But they represent a dawning recognition inside fund management that the current climate, while improving, still isn’t good enough. We must count that as progress.
• If you’d like more tips for investing in India and China, in the latest issue of MoneyWeek magazine, Max King picks two outstanding investment trusts that are available at attractive discounts to their net asset value.
• Merryn interviewed Daniel Godfrey for MoneyWeek some time ago – you can watch the video of that here.
• This article was first published in the Financial Times