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Time for the City to take time out

July 16, 2013
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Thank goodness, it’s that time of year again. Time to feel the sea air on our faces and the sand between our toes. Time to relax, unwind and forget the stresses and strains of everyday life.

If you’ve done what Sensible Investing recommends - i.e. you have in place a balanced portfolio comprising a diverse range of low-cost passive funds which accurately reflects your personal tolerance of risk - there’s no reason to worry about your investments at any time of the year, least of all when you’re on holiday. 

But for those of you whose investments are all, or partly, in actively managed funds, let’s at least hope, for your sake, that your fund managers are having some down time over the summer. 

One recent survey found that 18,000 employees of financial and insurance companies in the City of London had reported work-related stress, anxiety depression in the previous 12 months. The emotional rollercoaster they’ve been on recently, first with markets rising sharply and unexpectedly, then falling and then rising again, has probably left them in even greater need of some time away. 

In their book Fund Management: An Emotional Finance Perspective, psychoanalyst David Tuckett and behavioral economist Richard Taffler provided an extraordinary insight into the pressures that the people who invest our pension savings are under.

 The book is based on interviews with 52 pseudonymous managers in which they describe their almost permanent state of anxiety, forever fearing for their jobs, or at least their next bonus. The managers complained of being constantly pressurised by their own salespeople who are “living in cloud cuckoo land” and insisting on outperformance every quarter, and by managers who “don’t have a clue”. 

As a consequence, the book explains, fund managers are forced to act in ways which aren’t necessarily in the customer’s interest. For instance, they monitor their performance every day - some several times a day - which tempts them to place trades they might later regret. If they have a good first six months, some play safe and lock in their gains by taking more of a consensus view; conversely, others who’ve generated alpha early in the first half of the year feel they can then take bigger bets in the second than they otherwise would. 

In short, professional fund managers are just as prone as the rest of us to letting their emotions get the better of them and to making poor decisions as a result. 

So what’s the answer? Well, although we don’t recommend the use of active funds, we at Sensible Investing are realistic enough to know that there will always be a demand for them. That said, the fund management industry needs to be much more honest with itself about quite how hard it is to achieve sustained outperformance. Even the most successful managers have suffered prolonged spells of underperforming the market. 

It’s time to educate the people who manage these companies that it’s just not possible to find alpha month after month for long periods. Managers who genuinely do have a proven track record of beating the market should be trusted to put a long-term strategy in place and then be given the time to see it through. 

And instead of seeking the Holy Grail of year-on-year outperformance, the industry should be encouraging sales and marketing teams to expound the advantages of low-cost passive alternatives. 

There are, of course, obvious commercial reasons why that’s unlikely to happen. But we live in hope. And perhaps, then, there’d be fewer fund managers seeking help for work-related mental issues, plus healthier returns for the consumer after costs. 

Whatever your plans, have a safe and restful holiday... and remember, sensible investors: it’s all right to check on the Test Match while you’re away - and just how frightful the weather is back at home. But don’t even think about reading the financial pages.

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