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Why I Don't Buy Funds, by an Industry Insider

Updated: Apr 25

Here's a question for you. I used to manage the largest investment fund platform for a decade with over $300 billion in assets across 400 fund managers, why have I never considered buying a fund for myself? Read on to find out...

The asset management industry has a reputation for complexity, expertise, and success that is often shrouded in mystique. However, the reality is that most portfolio managers consistently underperform their respective benchmarks, particularly over more extended periods. In this article, we will explore the reasons behind this and why the industry needs to change to ensure better and more stable returns for investors.

Despite the prevailing belief in the prowess of seasoned fund managers and robust firms, empirical data consistently tells us a different story. The question then arises: why does the allure of active fund management continue to captivate investors despite overwhelming evidence of its inefficacy and poor management?

There is a High Cost for Hope 

The cost factor is one of the most direct reasons portfolio managers fail to beat their benchmarks. Newsflash! Paying one or two percent per annum will consistently erode performance. It's simple, the equivocal mathematical truth is that high fees impact performance, yet the industry's marketing prowess often overshadows this fact. The financial sector has mastered the art of selling, packaging hope and expertise in equal measure. Even when the manager's abilities are almost always unfounded and outperformance is statistically improbable, the marketing engine will spin an avalanche of jargon to confound the most sophisticated of investors.

The Psychology Clap-Trap

Investors so, so want to believe in investment miracles—something, someone....anything that will allow them to tick the box and help them sleep at night. The psychology of buying habits is as complex as it is fascinating. Investors often fall prey to narratives of exceptional talent, prestigious access, or simply the fear of missing out, not to mention the seduction of 'star managers' or the latest 'systematic or quantitative strategy' engineered by rocket scientists. Of course, all of which miraculously can predict and conquer the financial markets, caveated with a huge disclaimer. However, the reality is that markets are swayed by innumerable variables that no single person, AI engine or firm can foresee or control. When dealing with deep-seated human emotions like fear and greed, we all revert to our instincts and the revered belief in mean reversion. Even the god-like Ray Dalio at Bridgewater can get things horribly wrong.

Why do investors walk blindly into this well-devised trap? Partly, it's a lack of understanding of risk—both on the part of the investor and, ironically, the managers themselves. Sadly, while fund managers may be adept at analysing historical data ad infinitum, predicting future market behaviour and associated risks with a high degree of accuracy is more likely found in religious studies.

The Illusion of Expertise

Active management firms are adept at creating compelling, glossy narratives for gullible investors. Remember, you are not paying for financial expertise; you often buy into an elaborate, well-marketed story. A story that is gilded with high-profile events and luxurious brochures that promise exclusive insight and wonderous returns. Yet, beneath this thick veneer of bullshit lies a stark reality—approximately 90% of funds fail to deliver value when measured against their inconsistent performance and high fees, and moreover, in extended periods, the number can dwindle to sub 1%.

Gaping Need for Regulatory Reform

"Past performance is no guarantee of future returns" is emphatically stated by every manager, thanks to supposedly strict regulatory oversight. It should probably read, "High fees guarantee poor performance". The financial industry's regulatory frameworks must protect investors adequately and not serve up more jargon for the marketing engine. Let's face it: even the industry struggles to navigate what the hell is going on with the onslaught of ineffective gobbledygook by utterly detached regulators. 

A potential and arguably obvious reform could be the introduction of fee clawbacks for underperforming funds, similar to bonus clawbacks in the rest of the financial industry. The clawback concept could revolutionise accountability, force alignment with investors, and curb undue risk-taking in one fell swoop. What is clear is that having warnings plastered anywhere and everywhere is about as useful as a concrete parachute.

Why is Common Sense so Uncommon?

The asset management industry is in dire need of change. Investors must recalibrate their expectations and understand that no secret sauce or magical formula can guarantee market-beating returns. It's time to return to common sense. For core investments from retail to institutional, investing in low-cost mandates that track a combination of preferred markets, sectors and themes will probably work for most—even basic ETFs make more sense. We must move away from this romantic pursuit of finding that perfect manager who consistently delivers outperformance. Newsflash! I never found one. The industry must champion transparency and value, overhauling practices that prioritise 'undeserving' profit over basic investor welfare.

As we peel back the layers of marketing and mystique, what becomes evident is a need for an industry-wide introspection and a reshaping of investor education to foster a more realistic and fee-aware investment culture. Regulators and the financial community are of course responsible for ushering in these changes, but I urge every institution responsible for allocating investments to demand change.

As to the original question, I do not buy funds because the house, or rather the fund house, always wins in the long run.

1648 | Beyond Consulting

We help transform and future-proof financial firms. 1648 is at the forefront of today's rapidly evolving financial landscape, guiding wealth managers and fintech firms through discovery and transformational journeys. Our expertise ensures that these firms adapt to industry transformation and drive it forward by employing the most effective strategies and digital innovations. The future of wealth management becomes more transparent, intelligent, and resilient with 1648.

The strategies presented are thematic and do not constitute investment advice (or advice of any kind). No assurance can be given that the objectives of the investment above strategies will be achieved; the strategies involve risk (including, without limitation, illiquidity risk) and may incur a loss on some or all capital deployed. The opinions expressed, or indeed the information or assumptions that underpin them, may contain errors, mistakes, or omissions; no assurance or warranty can be made as to the accuracy or completeness of this information, and readers should not place any reliance on this content to execute investment decisions or for any other purpose. Readers accept full responsibility for using this content and are kindly requested to consult with their professional advisor before making any investment decision related to the same.

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