Tuesday
4 May 2004
Widows
failing to match trackers: The Scotsman
ANALYSIS
- MARK IRVINE
SMALL investors with a few pounds to spare are spoiled for choice when it comes to making their future that little bit more secure: starting up a new business, sinking some hard earned cash into property, investing in bonds or high interest accounts - even venturing into the stock market.
Few investors take their courage in both hands and aim to earn a fortune from high-risk investments: most are simply trying to make a reasonable return and ensure that their savings are tax efficient. As ever, the standard advice is to think long-term and avoid putting all your eggs in one basket and, generally speaking, small investors are happy with this cautious, prudent approach. The real question is precisely where to invest since the financial sector is awash with expensive advertising and wall-to-wall ISA adverts at certain times of year.
But no matter how impressive the marketing blurb, the usual health warnings always emphasise that past performance is no guarantee of future performance. How true, and for that reason most small investors decide to put some of their money into managed funds - where experienced professionals are paid handsomely to make the right calls.
From the small investor's standpoint, the purpose of a managed fund is to deliver a better return than a stock market novice could manage alone. If this were not the case, the sensible move would be to invest in bog-standard tracker funds and simply shadow one or more of the major stock market indices.
Following such a strategy, I invested a modest sum in Scottish Widows a few years ago. I was relaxed about performance in the short-term, but after financial markets fell around the world, in the wake of the terrible terrorist atrocities of 9/11, the outlook seemed to favour experience and sound judgment. Even to the novice investor, it was obvious markets would bounce back and - at the right point - highly paid fund managers would come into their own. Yet, as time went by, a gut feeling developed that Scottish Widows was badly under-performing, as the markets picked up and gathered strength. Despite all the glossy brochures and reassuring reports, a nagging doubt remained that things could and should have been much better. So, a little effort and research were required to compare Scottish Widows' performance against the market as a whole.
Incredibly, the truth was that any old tracker fund knocked Scottish Widows into a cocked hat, despite all the heavy marketing and extravagant claims about the potential of actively managed funds for future growth. So much for leaving things to the professionals - this looked like a case of money for old rope!
For example, Scottish Widows' American growth fund (based largely on shares in North American markets) grew at 5.7 per cent between January 2003 and 2004. Yet the Dow Jones Index jumped by 30 per cent during the same period. So, some hard questions seemed justified about whether managers were asleep on their watch - with ordinary tracker funds out-performing Scottish Widows by 500 per cent.
Similarly, Scottish Widows' European growth fund increased by 19.6 per cent during the same January 2003-2004 period. On paper a good result, but not after taking into account the fact that the FTSE 100, DAX and the FTSE 250 all grew by far greater amounts - respectively by 23 per cent, 47 per cent and 50 per cent over the same 12 months. Scottish Widows repeats the pattern with its global growth fund, which came limping home with a mere 11.2 per cent rise when markets across the world increased in value by anywhere between 20 and 50 per cent. Why has the company done so badly, so consistently? What is it doing to turn things around? What part do pay and performance packages play? What is the forward investment strategy and how is Scottish Widows communicating and sharing its thoughts with investors?
Now Scottish Widows is not alone in this marked underperformance in 2003. Many fund managers went liquid or into fixed interest stocks just as the market was turning. Others stuck with defensive sectors and were late to join the recovery in cyclical stocks, which led the fightback between March and December 2003 - explaining why the FTSE250 did much better than the FTSE100 last year.
While this kind of market intelligence is the daily diet of fund managers, it does not cast any light on why Scottish Widows' American growth fund, for example, performed so badly - trailing almost 25 points behind the year-on-year increase in the Dow Jones. The likely answer is that poor strategic decisions were made in the early spring of 2003 just as financial markets began to pick up.
A side, but related, issue is why so many insurance company UK equity funds are these days little more than tracker funds, though with a higher level of charges and fees.
Taken together, the evidence suggests little active management at pension fund level, but rather a strategy of investing in the top 100 companies in broad proportion to their representation in the FTSE.
So, having gathered the evidence, I decided to pose a few questions to the great and the good at Scottish Widows. While understanding all the health warnings perfectly well, the bottom line was that managed funds should have performed much better. The letter started out as a straightforward inquiry and asked a series of obvious questions:
Q 1 How will Scottish Widows deal with the under-performance of growth funds in deciding future investment policy?
Q 2 Why have recent annual reports adopted "median" instead of "average" performance indicators?
Q 3 What are the details of the remuneration package for individual fund managers and directors?
Q 4 How is performance taken into account in determining remuneration packages for fund managers and directors?
Q 5 How have remuneration packages changed over recent years, including the period 2003-2004?
After six weeks, Scottish Widows finally replied, but failed to answer any of the detailed questions. In a display of charm and customer care reminiscent of pre-glasnost Russia , a lowly apparatchik (not the corporate director) advised: "Scottish Widows funds are actively managed on a daily basis and do not track their sector exchange in any way. Therefore a comparison of the two are (sic) very misleading."
As a statement of the blindingly obvious, this deserves an award for its honesty and simplicity. But Widows failing to match trackers nowhere is the alleged unfairness of using recognised market comparators explained - nor are details of remuneration packages paid to fund managers and directors, which apparently are closely guarded secrets.
"Small investors are badly served by the complacent attitudes of the big corporations," says Alan Steel of Alan Steel Asset Management. "Scottish Widows consistently under-performs because it just follows the herd - whereas the best funds around have doubled in value over the past year, because they are managed by people with real talent and flair. The lesson for small investors is to choose a specialist company with a proven track record and a customer focus - the big boys don't do a lot for their money these days."
Quite! So, roll on Scottish Widows AGM in Edinburgh on 5 May 2004 where investors, both large and small, can ensure these matters are fully aired.
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