Moore on Personal Finance: Ahead of the General Election
Much has happened in two months since I wrote my article on the LISA and it would be foolish to speculate too much on what might happen to personal finance after the election.
The Conservatives lead in the polls and Theresa May is seen as a sound and capable leader – if for turning more than her predecessor Margaret Thatcher as we have just seen with the so called ‘Dementia Tax’ which I will return to later in this article.
George Osborne was dismissed as Chancellor of the Exchequer and now edits the London Evening Standard, free to snipe at the current Conservative offerings.
Sadly, ‘Spreadsheet’ Phil is never going to be so entertaining; however the Tory manifesto now provides room for him, or the next Chancellor, to sort out tax anomalies as it only pledges to hold VAT at current levels.
This is a pragmatic move because who knows what chaos Brexit may cause given the very harsh approach of the European Union; apparently even English teachers at expensive Brussels schools salaries are to be included in the divorce.
However we are not even at Brexit yet; firstly (and I don’t understand why) we have had to wait for France to elect Macron and then the German elections to, presumably, re-elect Angela Merkel if she has not done enough damage to Europe already.
So I am not going to talk about specific products in this article because all might change; there is however, a fundamental change happening in the world of investment management which will continue whoever is in power on 9th June.
Predominantly this involves Vanguard the Pennsylvanian company that took on the might of Fidelity in the USA.
With $5 billion of assets under management between them, the battle between these titans of investment management has been seen as the embodiment of the active vs passive debate; Fidelity’s aggressively managed funds vs Vanguard’s low cost passive investments.
Vanguard has now launched its Vanguard Investor direct to consumer service Vanguard Investor Targets DIY Investors) which offers a FTSE 100 tracking ETF at just 0.06% and an average ongoing annual charge fee (OCF) of just 0.14% on its trackers; charges for its Life Strategy funds have just been reduced to 0.22% which coupled with a platform fee of just 0.15% means an investor can maintain a portfolio for just 0.29% p.a.
Vanguard’s charges could send shock waves through the asset management and broking world.
Passive funds vs active funds.
I should declare an interest as I was an Executive on the Board of Fidelity Brokerage where I had the pleasure of meeting Ned Johnson on many occasions on my trips to Boston and his senior legal counsel Bob Posen, witnessing the incredible success story of the 401K division out at Marlborough including Bob Reynolds who went on to be COO.
Ned was a very difficult man to present to as he would leaf through the presentation and start asking questions about the conclusions whilst one was trying to build the story!
I never had the pleasure of meeting his daughter Abby (Abigail) who now heads Fidelity but Ned is as much an industry name as the Sage of Omaha – Warren Buffet. Both built incredible investment businesses.
‘Fidelity’s aggressively managed funds vs Vanguard’s low cost passive investments’
So what are active funds? These are funds managed by investment professionals who profess to have an understanding of companies that make up indices such as the FTSE100; Europe; USA; and emerging markets.
By buying individual company shares they hope to outperform an index such as the FTSE 100 or other FTSE indices. For the analysis of the companies and judgement as to which stocks to purchase or sell or keep on hold they charge a premium price often over 100 basis points (bps) – 1%.
Passive funds however are simply tracking an index – e.g. FTSE100; they simply try to replicate the capital values of the FTSE 100 companies, which may sound simple but it is not.
Passive funds track the indices (subject to tracking errors) so if markets go up so does the value of the fund; if the index goes down so does the value of the fund.
There is no investment manager (other than an algorithm) so no need to pay premium prices for tracking an equity (or bond or other) index, so charges are in the region of 15 bps or less.
I digress for a moment because Abby Johnson is seeking to bring Fidelity into the bitcoin era and apparently Fidelity is mining bitcoins with its huge computing resources – a topic that I will return to in another article – but to further digress it is bitcoins that are demanded by the recent ransom attacks on computers.
I had the misfortune to be on the receiving end of one of these with my then business European Pensions Management; a nasty experience but as we had good backups (that is the key lesson for this type of attack) we were able to restore an unaffected backup and resume business.
So back to my main point – active vs passive.
Personally, I am not binary on the issue – the right active funds (including hedge funds) have their place despite the higher charges.
However, they need to demonstrably perform and it is regrettable that many so called ‘active’ funds have been closet index trackers, but charging 100 bps or more; there is no defence for that – greed pure and simple, I have no time for those types of managers.
However, I will defend able active funds that add value although they do appear to be lurking towards dinosaur territory.
‘closet index trackers, but charging 100 bp or more; there is no defence for that – greed pure and simple’
I recall my days as both a Trustee and then Chairman of Trustees of the British Horse Society Pension Fund, led by a lovely man Peter Fenwick of the eponymous store in London.
There was a slight glitch in that they were trying to run a fully insured scheme as a self-administered scheme with, under the rules, an illegal bank account.
Whoops! So I stepped in and started to assist the BHS Scheme (not the Green version) with firstly a proper self-administered constitution and then secondly with a more appropriate investment strategy.
Initially this was placed with Nicola Horlick at Mercury Asset Management (MAM) as an Active Fund Manager; I was one of the first to appoint her, and became the first to sack Nicola and MAM because frankly the cost of investment management was not supported by performance.
There were some lovely people that came to present to us including a lovely man called Toby Vincent a former Army officer who is now an incredible novelist and I’d point you to his first and second novels – Driven and Crash; another digression but if you want some fast and steamy reading then read on.
Anyway, I sacked Nicola Horlick and in the 1990’s looked to an incredibly future thinking strategy. I set up a life style pensions investment system based on age that embraced active fund management for earlier years then tapering off with index funds, gilts and cash which was revolutionary at the time.
Active fund management had to go out to tender of course including to MAM but in the end we picked Fidelity because they presented the most convincing case with a crocodile (i.e. upper and lower jaws) approach to analysis of THEIR performance.
So there you have it; active management (with higher costs) and passive (with lower costs) can co-exist as I demonstrated in the 1990’s – each having a role to play at specific points on an individual’s financial journey.
In previous businesses I wanted to make much more of Vanguard we were unable to cope with pooled accounts – there is a huge ‘what if’ for me here.
I mentioned at the start of the article about the so called ‘Dementia Tax’; I am so glad that Merryn Somerset Webb of the FT and Editor of Money Week came out against criticism of the initiative which in reality was the first cogent attempt to find a balance between state support and individual/ family support.
The Labour Party and Liberal Democrats have been shameful in portraying this initiative as negative.
Firstly less than 1 in 6 will suffer from dementia – sad though that figure is, and extremely distressing for families affected – and secondly, the minimum retention of assets will increase to £100,000 which is about four times the current level of wealth saving.
So, people with large property assets – for which they have done very little to increase in value other than by post code lottery – will lose out, but that is not a tax.
There is £5.5 trillion of value in properties; even a hardened Conservative like me sees this as progressive and a real start to trying to tackle the social care issue – well done Theresa May.
I regret the U Turn but I guess in electoral terms it had to be done because of the shameful approach of the Labour Party and Liberal Democrats, who should have welcomed the initiative for what is was.
So my friends, this is enough for now but I hope plenty to think about; when the election is done and dusted we can see who the Prime Minister appoints and go from there