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Fund Managers Wear Emperor's Clothes

We hear a lot about city bonuses and banker fat cats, but who are these people and how do they become so obscenely rich? Who's paying for them? Well the good news for all our leftie politicians and union leaders, it's not 'the workers'. At least not directly. It's the suckers they call customers. In fact the income and corporation tax that these fat cats and their employers pay to UK plc, supports a significant chunk of our welfare state. So let's not be too hasty to condemn them for earning loads of money. Let's instead consider whether they are providing value for money and therefore how they might pay even more in taxes by selling their services to ever larger numbers of customers abroad. We call that 'export'.

So I'm all for them, but not if they continue to con me and everyone else caught up in their greed frenzy. Not if they simply don't deliver, but make you believe they are, or will.

The people who pay for 'casino bankers' (otherwise known as fund managers) are mainly rich people and, indirectly, pensioners. Fund managers generally earn annual commission of between 1% and 2% of the money we give them to manage - whether they increase its amount (which is their sole objective) or not. And in my experience (together with those of many friends with longer experience than me of these people), 'not' is the usual outcome. In other words, they take up to 2% of all your money, every year, in the hope that next year they will do better than your mattress (ie a reasonably safe but unexciting place to keep your money, where the only hope of it increasing in value is relative to mattresses in other countries). After 25 years, they will have kept up to half of your money for themselves - whether you've made a penny out of them, or not.

There are various types of 'fund managers'. But in general they boil down to being boring or arrogant. The boring ones invest your money in stuff you could have worked out for yourself (and saved the 1-2% commission). Things like shares in large corporations (barring the fact mine did pick BP just before Deepwater Horizon), unit trusts, and treasury bonds - all in your home currency (why take a risk on exchange rates as well). The arrogant ones think they know which way the markets will turn, and will back their hunches accordingly with your money. Truth is, none of them know, and all their guesses even out in the end, assuming they stay in business long enough. Some they win, some they lose. But they all have several tricks up their sleeves to keep their punch-drunk customers shelling out, year after year.

Trick 1: Tomorrow is another day. "Have courage. Don't lose your nerve. Everything bounces back eventually". The trick is that no matter how badly they perform, they make you believe that next year will be better. "It can't get any worse". The problem is that eventually, any pin stuck in the FTSE 100 will recover from a fall. "See, I told you so".

Trick 2: "Its the market. Everyone's in the same boat.". Instead of accepting that they picked losers, they will point out that everyone's a loser in this market. This may be true, but it doesn't excuse them for leaving you in it. Anyone can buy investments, its deciding when to sell that's the difficult bit.

Trick 3: 'Relationship Managers' (the people you speak to) are invariably very nice people. They are good company and entertain well. They also always know their stuff. They have endless statistics to hand and know where all the major markets are at any point in time. They reek confidence. It's infectious. You don't want to ever have to tell them off. They make you believe you're the most important client they've got and that if their 'people' get it wrong, then they will make them invest more wisely for you in future. They're highly paid schmoozers whose only measure of success is how much they get you to put in, and whether you stay with them.

Trick 4: Benchmarks. They measure your portfolio's performance against industry benchmarks - ie aggregates of similar portfolios. When they under-perform against these, they claim the benchmarks are misleading. If they ever outperform those same benchmarks they're smug and keep reminding you of their success.

Trick 5: Past performance period selection. If you want to prove that a fund or wealth manager is a good performer relative to their competitors, pick a date range to make sure this is the case. For example, a fund might have performed badly over the past 3 years, so how about boasting about the last 5, or even 10 years. Only boast about a period where you did well relative to your competitors.

Trick 6: Play it safe, but hint that actual performance will be better. Fund managers use investor 'profiles' to define what appetite for risk you have. The formula is meant to be simple. If you have a low appetite for risk (ie you can't afford to lose money), then they'll only invest (theoretically) in stuff that shouldn't make you a lot, but shouldn't lose a lot either. A 'moderate risk profile' means you might make more, but might also lose more. A 'high risk profile' means they'll gamble with your money as though they were at the races. So far, so good. The problem is that everyone wants a low risk profile as far as the downside is concerned, and a high risk profile for the upside. In other words, you tell them "if I wanted a safe investment, I wouldn't need you". So to make the decision to invest with them more exciting and 'greed-fulfilling', they say "it's not unreasonable to assume you'll achieve far better returns than your 'safe' profile suggests you might achieve". Of course the reality is almost invariably the lower end of your profile's range, and NEVER higher than the top of your profile range. But the hope of 'something for nothing' is always implied.

Trick 7: "You might miss out". Ordinary folk don't have the authority to buy some of the stuff these people can buy for you. So if you want the opportunity to 'make loads of money' from the sorts of things only they can buy for you, like shares in Private Equity, hedge funds, or things called 'special instruments' - ie' their own cunning products that seem too good to be true - then you have to have an account with them. The problem is, of course, that all those 'special investments' won't make any more money for you than your mattress - but what is guaranteed is that your fund manager will make vast sums out of what they persuade you to buy. 'Special investments' are dressed up to appear as though you can't realistically lose, and might, in all probability, make vast amounts. It's a bit like betting on the lottery or a horse race. The horses with the highest odds look just like all the horses that win races, and every lottery ticket has the same chance to win squillions. So mugs think they've got a reasonable chance to win big. Some hedge funds make hundreds of million every year, so the one you're being offered surely stands the same chance. Fat cats own Private Equity vehicles and hedge funds - that's why they're fat. So why don't you buy a slice of the money-making machines they all use? Of course the reality is that if its offered to you, it's because no-one else wanted to buy it, mainly because in the fine print it says a massive chunk of the investment goes to the fat cats themselves, and to their sales agents - your 'impartial' fund managers - irrespective of whether they make you a bean or not. But just in case they do accidentally make a lot, you only get to keep a capped amount. They keep the rest. Another 'truth' is that fat cats get lazy. So you are more likely to make money out of brand new funds (which you're unlikely to be sold because they don't pay fat commissions) than you are out of one's who sell purely on former reputation.

So everyone with their snouts in the trough gets rich - except you - for as long as they keep you thinking next year will be different. A friend who has had similar investment luck recently suggested to me, "Why don't we just pay the bastards ten grand a year and keep the money in the bank. That way we'll know they're not going to lose it all for us, and we won't have to sweat over whether we did the right thing or not". Seems sound to me.


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