What Americans can teach Europeans about fund fees

I wrote earlier on the matter of fund managers and their many failings as a group. If that isn’t enough for you, you can also read Tim Price on the subject.

And if you want to be even more irritated, you can then turn to Monday’s FT where you can read all about how we in Europe unwittingly “consent” to being ripped off by fund managers.

John Authers (who is really no great fan of the active fund manager industry) has had a look at the fund fees we so often comment on here, and found that America’s investors appear to have learnt two key lessons from the last few decades.

The first is that “chasing past strong performers is a mugs’ game”. Americans spent much of the 1990s buying funds that had already been successful – more than 80% of the money that went into funds in the 1990s went into those with four or five-star ratings from Morningstar. This didn’t do anyone much good when the crash came.

The fact is, as Howard Marks noted at the London Value Investor Conference last week, that finance is jam-packed with “success” stories who have so far been “right once in a row” in an industry where “short-term randomness can create almost any outcome at all”. Doing well in a bubble has no predictive effect on performance in a non-bubble. At all.

The second thing Americans have learnt is that while past performance tells us very little about the future (Authers and I disagree here in that I suspect there is such a thing as a good long-term manager out there somewhere), “low costs are vital to overall returns and managers who have maintained low costs in the past tend to maintain that culture in the future”.  They no longer chase performance; instead, they chase ‘cheap’ and hope performance follows.

$292bn has flowed into the quarter of funds with the lowest fees in the last decade, and $368bn has flowed out of all the others. The result is that equity funds held by US investors now charge an average of 0.64%. That’s down from 0.93% a decade ago.

Better still, some 30% of assets in the US are managed for less than 0.5% a year. Compounded over many years in an era of very low returns, that matters. Shame then that Europeans haven’t used their money to put pressure on their managers in the same way: more than 60% of fund costs here are still over 1% a year.