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  • Writer's pictureNoel Watson

Investment management is commoditised

Updated: Dec 21, 2023


"Investment management is commoditised": What exactly does that mean?

At Pyrford Financial Planning, we believe the "investment problem" has been solved and that most investors would be best served by owning low-cost passive/factor funds in their portfolios. These funds have been available in the UK for over a decade, and this is how we invest our clients' money. Below, we look at the alternative style of investing, active management, the challenges this approach faces, and why someone might recommend this approach.

Picking winners

An overwhelming body of evidence shows that the average active fund manager underperforms their benchmark after costs. SPIVA is an excellent example of this research, but there are many more. Of course, you may feel that you have no intention of selecting average fund managers and will only select outperforming (star) fund managers. Unfortunately, the evidence suggests that this is tricky to do.

But someone showed me a nice chart!

I frequently encounter stories on social media where someone decided to engage a financial adviser (or investment manager) because they were offered access to outperforming funds that they wouldn't otherwise be able to access. It even happened to me in a previous life (the city was a rich hunting ground for "traditional" financial advisers selling "star fund manager" magic!).

Neil Woodford's performance versus the average manager and FTSE All Share
Neil Woodford's performance versus the average manager and FTSE All Share

These pitches can seem very convincing, but there are a few things to understand:

  • You may only be shown the funds that have outperformed, not those that have underperformed and/or closed.

  • The fund is being compared to the wrong benchmark. This analysis is not easy to undertake, and it takes a firm like AQR (run by legendary Twitter pugilist Cliff Asness) to undertake this complex work.

  • The graphs are backwards looking - would they have been recommending the same fund in 1999 (the start date for the graph in our example)?

There are fund managers that have a consistent track record of outperforming the market. These firms tend to be very secretive and are staffed by maths, computing and statistics wizards with high levels of intelligence. The only drawback is that these offerings don't tend to be available to external investors (why give a good thing away?). Furthermore, given the complexity of these strategies, it's unlikely that the average investor would be able to understand how these strategies work. Many believe you should fully comprehend a strategy before investing your money, so even if these offerings were available, they may not be suitable for all.

An easier sell

We feel that an active management approach is an easier sell versus the boring "capture the returns of the market" passive/factor alternatives. There are many, many investors out there who love the idea of star fund managers. However, successful client outcomes are key for us at Pyrford Financial Planning. We believe that our investing approach, which is backed by evidence and data, gives our clients the best chance of success, and this is more important to us than attracting more clients through "selling the dream" of outperformance. In fact, we believe chasing outperformance is one of the biggest risks to a client's financial plan.

"When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear."

At Pyrford Financial Planning, we prioritise client outcomes over "selling magic" to potential clients
At Pyrford Financial Planning, we prioritise client outcomes over "selling magic" to potential clients

Why use a financial adviser if investing is commoditised?

You may ask yourself, why bother paying for a financial adviser when investing is commoditised? It's a valid question, especially if the service you are being offered centres around the (commoditised) investment proposition. We believe investments are just one part of a comprehensive retirement planning offering. and if you are going to pay for advice, an approach which involves genuine financial planning is what you should be seeking. Part of this service should include working with someone who helps you stick to the financial plan during periods of inevitable market volatility. We mentioned above that we believe the "investment problem" has been solved, but the biases we humans exhibit are unlikely ever to be "fixed", and we believe that working with a trusted adviser backed by a robust financial plan can help minimise the "investor problem".

Next steps

If you are planning for retirement and want to discover more about our retirement planning service, please get in touch.

About us

The team at Pyrford Financial Planning are highly qualified Independent Financial Advisers based in Weybridge, Surrey. We specialise in retirement planning and provide pension advice, investment advice and inheritance tax advice. Our office telephone number is 01932 645150. Our office address is No 5, The Heights, Weybridge KT13 0NY Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Although best efforts are made to ensure all information is accurate, you should not rely on this blog for your personal situation or planning. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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