There were 4,722 UK unit trusts and OEICs in the Trustnet database as at March 2023. That is without counting the 10,142 UCITS funds domiciled in Luxembourg, many of which can still be bought in the UK post Brexit and the 2,500 UCITS funds domiciled in Dublin; and 177,000 worldwide . That compares with 1,983 listed companies on the London Stock Exchange, 1,508 companies in the MSCI World Index and 58,200 listed companies worldwide. In simple terms the number of mutual funds available to the investors seeking a good home for savings was 3 times as many as the number of listed companies in whose securities they could invest. OK, some of them were funds investing in bonds of various types and some a mix of bonds and equities.
Too much choice is a turn-off
But, even so, are all these funds really necessary and does the average investor benefit? You may argue that providing a wide range of choice for investors is what a free and competitive market place is all about. But is this true? The well known jam experiment conducted by researchers from Columbia and Stanford Universities, found that while the big display table (with 24 jams) generated more interest, people were far less likely to purchase a jar of jam than in the case of the smaller display (6 jams); in fact about ten times less likely. And many were put off buying any jam at all. Many studies since have shown that too much choice paralyses the customer, particularly when the product is complex and comparisons harder to make. Does the psychology of choosing which jam to buy apply to mutual funds? It appears to. A US study showed that reducing the choice offered to employees in a company’s defined contribution pension scheme reduced ‘churn’, where there had been a tendency for individuals to switch from fund to fund to chase ‘performance’. So it saved cost, leading to higher long term returns.
So why do fund managers offer so much?
If all this is true, why do many fund management companies offer an ever growing range of funds? There are probably several reasons.
The first is fashion. Just as clothing manufacturers seek to persuade their customers that they will not look desirable, handsome or look like their favourite celeb unless they wear the latest bit of stuff, so do fund managers seek to persuade their investors that they will make more money or be in tune with some investment guru if they invest in the latest hot fund.
The second is profitability. Managers may be able to get away with higher fees if they offer what appears to be a special ingredient in the management of the fund or offer an exposure that is hard to replicate, or be early adopters of a fashion, thus piling on extra assets on which to charge their fee. This applies particularly to actively managed funds facing the relentless attack of passives; but passive funds too are guilty as illustrated by the ever growing number of specialist ETFs.
A confusion of names and descriptions
Apart from confusing the punters, there is a problem naming all the runners. This leads to a proliferation of strange names designed to differentiate the fund from the others; and of course to be accurate in its description as the regulator requires. No Flying Tigers or Leaping Dragons, as a Chinese client once suggested to me. Although the name of one of the world’s most successful money market funds, Yu’e Bao, means Leftover Treasure. But here is a selection of real funds, names of management companies hidden.
******Emerging Markets Enhanced index B USD (does ‘enhanced’ increase risk or reduce it?)
******Megatrends Protection Portfolio A GBP (protection against what?)
******Global Short Dated Climate Transition S Acc EUR (let’s go green as fast we can?)
*******Risk Master Conservative Multi Asset C (got some good conservative words there)
Notice lots of letters of the alphabet from A to Z for different share classes. There is no accepted or regulatory standard for their use and different companies use them to mean different things.
What to do with the redundant products
The other problem will be that when the champ is no longer winning races or after their sell by date, the stable will be full of old nags past their best. The investment style or sector is out of fashion; assets under management are trickling away with redemptions; and the fund is costing money and not earning its keep. So, send it to the knacker’s yard. That means either closing or merging it; or maybe renaming it in the hope that the old steed can be given new life. It is interesting to see how often this happens.
There will certainly be many funds shown in the one year section of the bar chart above coming up for a humane death.
Apart from getting shot of some old jades, burying poor performance is an added benefit. Who would want to have a fund whose 1, 3 and 5 year performance was -98, -98 and -98 blemishing their track record? That sounds like a Russia fund, a good candidate for a merciful release from its agony.
If it was simpler we wouldn’t need the hordes of rent seeking advisers
Finding the way through this jungle needs a good guide. And there is no shortage of advisers, fund selectors, and ratings services and other guides who can earn a penny or two aiming to provide a safe path through the forest. But would they really be needed at all if there were fewer funds with simpler objectives?
An object lesson here can be found in a fund that has proved popular over the years. That is Terry Smith’s Fundsmith Equity Fund, a fund that did it all, which as he puts it invests in “just a small number of high quality, resilient, global growth companies that are good value and which we intend to hold for a long time”. His greatest error was to add another fund under his brand, the Fundsmith Emerging Market Equity Fund. It was wound up in 2022 after delivering a poor performance over 5 years. Emerging markets come into and go out of fashion with regularity, alternating with being the next big thing and a disaster. Not for the faint hearted. Well done Terry for your honesty.
Most people don’t want to try to allocate assets
What does the average person, perhaps saving for a pension, actually want? Almost certainly not to do their own asset allocation or to have to choose which shares to buy. They want that done for them. They are attracted to simple funds. The best-selling sectors in 2022 were North America, Global, Gilts, Targeted Absolute Return and Global Equity Income. Individual regions, Japan, Europe and UK suffered net outflows. Even more indicative of investor preference for a clear simple long-term strategy and a global coverage is the fact that most of the top selling funds on the four best known platforms were global or ‘safety first’ like money market or gilts; or indexed target date funds aiming at a retirement market. But ESG funds, fashionable for decade, went into reverse on relatively poor performance and criticism of greenwashing. Despite this, the number of seductive ESG funds on offer rose by 89% as fees on them rose according to a study by Fitz Partners. Plus ça change.
Don’t be seduced by choice. Keep it simple.
What should the ordinary saver into a pension learn from all this? Keep it simple and global, don’t keep switching to follow fashion or celeb fund managers. And most important don’t follow investment gurus who tell you they can identify the top performing funds of the future. Just find a fund management company that looks as if it will still be around when you intend to retire, choose their global fund, ignoring offerings with fancy names and keep investing regularly. It’s how much you save and how long you save that matters. Investment returns are secondary. Even most actively managed global funds perform much in line with each other over longer periods and index funds are there for non-believers.
If you would be amused by some more comments from a cynical old stager go to markstgiles.com
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