Interesting comment from a senior official of Lloyds Banking Group to the Treasury Select Committee.
He admits that most fund managers aren’t worth what they’re paid. Which is great news. Maybe they’ll sack most of them so charges will be lower!
Sadly, he (and all the commentators by the look of it) still think that a fund doing well is definitely a sign that the manager is good, not lucky.
At one point, he said “There are definitely people who are very good at fund management over the long term”.
I’d love to be on the select committee and be able to ask him questions. Such as:
How did you work out what “very good” looks like, how it differs from “good” and how you measure it and know that it isn’t about being lucky? And how do you define, “long term”, 10 years, 20, 30, how many funds and teams have been in place that long?
How do you calculate the luck factor, given that you’ve got odds of 1 in 4,096 of getting index beating performance for 12 years running and there are over 6,000 funds in the UK? And given that very few managers (or even teams) carry on running the same fund in the same way with the same criteria for 12 years anyway (let alone 20 or 30), how are you going to judge it – who “creates” the team performance?
How do you justify paying these people a fortune when you can’t demonstrate that they are anything other than the lucky few, you don’t really know how to identify them (except by the fact that they have been lucky enough to get good results in the past and there is no guarantee they will in the future) and they may well not be responsible for the results anyway since there is a changing investment team behind them? So how do you justify the expense when for a fraction of the cost investors can use passive, index linked funds – which perform better and are recommended by the one person who seems to be able to peform better than the index consistently, Warren Buffet?
And I’d love to be able to ask him – “OK, tell me who those ‘very good ones’ are. You can carry on paying yourself and them big bonuses (if you sack the others) but if any of them underpeform you have to pay back all the money you’ve been paid because obviously they weren’t that good. Or are you saying that actually, you know they have been lucky so far, and you don’t want to bet your bonus on them carrying on being lucky? So why do you expect the public to be prepared to gamble on your guesses about who is lucky and who is skillful, when you aren’t prepared to put your own money where your own mouth is?”
I don’t suppose I’ll get the chance. But it would be nice to see if he actually understood the questions, since I’m confident he wouldn’t have any satisfactory answers.