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Tim Guinness: why discretionaries should incubate smaller funds
by Danielle Levy on Sep 23, 2013 at 09:01
As the popularity of lower cost passive funds continues to grow, with charges at all levels coming under scrutiny, Guinness said the threat posed to active managers should not be underestimated. As a result, he says the active fund industry needs to be realistic about price.
‘I think active managers are blind if they don’t see that passives and exchange traded funds (ETFs) are a big threat. They are going to acquire market share unless active managers address this threat,’ he said.
‘This is why active managers need to be realistic about price. That doesn’t mean going 100% head-to-head on price, but being prepared to work out if whatever premium you are charging on an ETF is sensible.’
This helps to explain the rationale behind Guinness’s decision to slash the annual management charge on the firm’s £32.4 million Global Equity Income fund from 0.75% to 0.25% late last year for the first £100 million invested.
Nonetheless, the chief executive takes the view that conventional ETFs are flawed in terms of the potential benefits they offer to investors.
‘I think passive contains a terrible flaw. Passive funds are stupid because mechanically they buy when a company is expensive or cheap. They suffer from two problems,’ he said.
‘One that is not much talked about is the front-running problem that you see. Active managers can look at an index, look at the flows coming in to buy some of the less liquid stocks and exploit that.
‘What I believe also happens is you get the effect where large passive funds create outperformance due to the weight of money that they are putting in, which pushes stocks up. This is quite dangerous for an investor coming in late cycle because you are actually buying a portfolio of stocks partly pushed up by the weight of money flowing into them.
‘When the market turns it will come down faster so they can be riskier than you think, while active managers, by owning good value stocks, should be able to beat them.’
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by Danielle Levy on Dec 04, 2013 at 11:37