ALEX BRUMMER: Why the Coronavirus crisis could restore trust in active fund managers
There is no escaping the reality that it has been a terrible time for active fund management.
But it is possible that the panicky volatility unleashed by Covid-19 could provide a lease of life for what has been a rickety sector.
Over the past year, even the most highly regarded houses such as Schroders have seen outflows, although in its case the impact was disguised by the contested arrival of some £41billion of Scottish Widows assets from Standard Life Aberdeen (SLA).
It is possible that the panicky volatility unleashed by Covid-19 could provide a lease of life for active funds
Latest numbers from SLA show that after stripping out the Scottish Widows mandate it was still a chunky £17.4billion down on the previous year in 2019.
Outflows were focused on the group’s Global Assets Return Fund which suffered £10.6billion of withdrawals.
Newly quoted M&G (the UK arm of Prudential) also saw £1.3billion of fund withdrawals in 2019.
The loss of faith in active management is not confined to SLA and M&G. The main criticism of the sector is high management charges – often ten times or more of those in passive funds – which over the years gnaw away at investor returns and make the star managers and executives very rich.
Active funds also suffered serious damage to their reputations as a result of the irresponsible management within Neil Woodford’s investment empire, feeble supervision by authorised corporate director Link and the snail’s pace of intervention by the Financial Conduct Authority.
Trust has not been helped by the mismatch in assets and liquidity seen in funds such as the M&G Property Portfolio, which was suspended on December 4.
The overwhelming reason for disenchantment with active management is that during the good times on equity markets the passive funds, which shadow indexes, can perform just as well.
Passive and exchange traded funds (ETFs) can be accessed more cheaply and, in the case of ETFs, more rapidly bought and sold than closed funds.
SLA chief executive Keith Skeoch points out that it is in uncertain times like these, caused by the spread of Covid-19 and the disruption to the global oil market, that active managers come into their own.
If carefully run they should be designed to withstand the turbulence and herd instincts of stock markets. Liontrust Equity Income Fund avoids stocks where dividends are paid out of reserves or borrowing.
After the coronavirus scare the active managers with cautious strategies could be limbering up for a comeback.
The most encouraging aspect of the General Election result is that it gave Government the wherewithal to get things done.
It may currently be diverted by the public health threat but it has been in overdrive, seeking a quickie trade deal with Brussels, giving the £106billion HS2 project the go-ahead and allowing Chinese participation in the roll-out of Britain’s 5G networks.
There was an expectation at Westminster that Johnson’s backbenchers were going to give him a bloody nose over the Huawei involvement in the project.
They were deeply opposed to allowing the Chinese, the world’s biggest intellectual property thieves, to have a role in our mobile phone networks.
As it happens I agree with Johnson’s critics and with Donald Trump, who opposed the Huawei deal.
But having made the decision, restricting Huawei’s role to 35 per cent of the project and less sensitive equipment, it is good that it is not being stopped.
Johnson’s potential 80-seat majority may have been reduced to 24 but at least this piece of infrastructure investment, critical to greater connectivity, will proceed.
It is hard to see the green lobby going to court to suggest it doesn’t meet Paris climate change obligations. But you can never tell.
After a long hiatus the UK has a Government with the ability to get things done. Hurrah!
Close Brothers is the nearest thing the City has to an old-fashioned merchant bank with trading, advice and asset services.
In contrast to the computer-driven trades of big investment banks it owns an old-style market maker, Winterflood, able to balance buy and sell orders in an orderly fashion and deliver best prices for investors.
Good to see that amid the carnage Winterflood volumes are at record levels.
A small victory for the human touch.