“We spend little time on fund selection and even less on fund reviews because this is a service that is not valued by clients. Instead, we spend time with our clients discussing their needs and how they can achieve their goals.”
Nick Lincoln is the director of Values To Vision Financial Planning.
Q: Recent results have suggested some fund groups are still suffering from the departure of their previous star managers. What is your opinion of the star manager culture?
A: I am a passive fund convert so I do not even look at the results that active management groups put out.
With regards to the star manager culture, I do not think it is a good thing for the group and the investors.
Anthony Bolton, [formerly the manager of Fidelity Special Situations], was a true star manager. When he resigned, it was a long and difficult process for Fidelity and its investors. Fidelity suffered redemptions and investors were unsure where to put their money. Who is to say that the manager who replaced him is not any good?
Neil Woodford, [the manager of the Invesco Perpetual Income fund], has been running money for around 20 years. Who is to say that he will do that for another 10 years? If he leaves, Invesco Perpetual will be in a very difficult position.
It is dangerous for both the group and investors to put so much money into the hands of one or two managers. It adds another layer of uncertainty.
Q: Does this support the investment case for passive funds?
A: It does. Advisers have to persuade clients that they have to take some risk in order to achieve their goals. They have to take their money out of the bank account and invest in the market. For most clients, just taking this market risk is enough. If they invest in an actively managed fund, they take on another kind of risk, that of the fund manager and the group.
Past performance is no indication of future performance and there is no proven way of identifying a star manager. (article continues below)
Q: Why do you prefer passive funds to active?
A: Active funds give the market returns less the costs, which includes annual management charge and total expense ratio. Neither of those cover the dealing cost.
It is impossible to predict which manager will outperform the market to cover the costs and generate a return, especially in the UK and the US. Those markets are so efficient it is virtually impossible to outperform on a year-on-year basis.
Whereas passive funds aim to capture the market returns. We use Dimensional, a passive fund provider. They are very scientific and analytical in their approach. They have concluded that value and small cap funds have outperformed so we buy the UK stockmarket en masse but with a small cap and value bias.
Anthony Bolton was a small cap value investor. It was small and mid caps where he got the fund’s outperformance from.
Q: Last year the American passive fund provider giant Vanguard entered the British market. Many investors predicted this could trigger a passive price war. What is your stance?
A: Vanguard were the pioneers in the US and are now enormous. Most of the funds they provide are already available. However, the Vanguard FTSE UK Equity Income Index fund is unique. It is positive that they came into the UK market. It brings investors more choice and there is now more competition.
Q: Do you ever use active funds?
A: We use active funds to get exposure to property because there are no suitable passive investments in this sector. Within the property sector, we prefer bricks and mortar funds to Reits [real estate investment trusts]. We use, for example, the L&G Institutional Property fund.
Some clients have an element of active funds in their portfolio but only where we have not found a passive investment yet. The portfolios of our new clients are invested in passive funds.
Q: When are passive funds not appropriate investments?
A: I would say passive funds are always appealing. But if somebody wants to gamble and take a bet in a certain sector or area, then passive funds are not appropriate.
Q: What criteria do you apply when selecting funds for clients?
A: Cost is important. We do not pay attention to rating agencies or the like.
We spend little time on fund selection and even less on fund review reviews because this is a service that is not valued by clients. Instead, we spend time with our clients discussing their needs and how they can achieve their goals.
We have five different model portfolios with different equity weightings ranging from cautious to aggressive. The cautious model portfolio, for example, is 20% invested in equities and 80% invested in bonds. Whereas the aggressive portfolio is 100% invested in equities.
This is easy to understand and implement. We offer fee-based financial planning and our clients are normally mass affluent but not high net worth individuals.
Q: What are the biggest challenges passive fund providers face at the moment?
A: Now is the best time for passive fund provider because of the changes imposed by the RDR [retail distribution review]. Passive funds do not pay commission so a lot of advisers do not even look at them. Our work is fee-based.
Active funds have not at all delivered what investors expected during the credit crisis. Active fund managers are expected to outperform in both rising and falling markets but they have largely disappointed.
One problem is that passive funds can be difficult to sell, depending on how advisers present them. They appear not as exciting as those funds managed by star managers and featured in the press.
Q: So you are a passive funds advocate. What can you get enthusiastic about in your free time?
A: I love spending time with my family: my wife and my son. Other than that I enjoy cooking, tennis, reading non-fiction and socialising. I also play bass guitar in a very loud and awful band.