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In the final morning session on Day 1 of the Morningstar Investment Conference, Mark Tennant, chairman of Honister Capital, took to the stage as interviewer and put Edward Bonham-Carter, Jupiter’s Group Chief Executive, on the spot.
What makes a successful fund manager? And what are the challenges for active fund management? These were the first two questions Bonham-Carter faced. A good fund manager needs people with whom to have a strong discussion, was Bonham-Carter’s first response. But the main challenges for active management is of course the need to deliver value after fees, he added. ETFs have raised the bar for active fund managers, Bonham-Carter pointed out. There is also the long term challenge of ensuring that clients know exactly what they are buying and that the risk they are taking fits their personal preferences. “History does not repeat, but has a habit of rhyming,” Bonham-Carter said, quoting Mark Twain, and pointed to the challenge of maintaining a fund’s strong performance over time.
Next question: What can we do to reduce volatility in a portfolio? The right answer would win a noble prize, said Bonham-Carter, so in reality volatility should be expected. While it's difficult to persuade retail investors in that argument, the only thing that an investor can do is monitor their portfolio closely and make sure you don’t rebalance more often than necessary and fall victim to market noise and anxiety. Bonham-Carter pointed out that UK retail investors have actually proved to be rather calm in comparison to their counterparts across the Channel and said that in fact it's institutional investors that have a pro-cyclical bias.
Moving on, Tennant pointed to a study that revealed 90% of fund managers worldwide have underperformed the index. What can you do to defend the name of your industry, he asked? The market for active management will remain, but there will be increased consolidation and demands on managers to not act like “closed indices,” was Bonham-Carter response.
The question of fund managers’ and advisers’ fees came up in this discussion on a number of occasions. It is it "nuts" that nearly half of a pension fund’s fees are allocated towards distribution channels and investment advice from banks and advisers, Tennant observed. Meanwhile, he also noted that the advice industry is one where there is no customer cost pressure at all. Will RDR provide this pressure? The industry is maturing in terms of demographics and there will be consolidation both at the fund management and the fund level, responded Bonham-Carter, while agreeing that there is an excess of choice at the moment--something that is going to change going forward.
Again on RDR, will the reform achieve the objective of raising IFA qualifications? Tennant asked. On the one hand there is the danger of overqualifying and on the other there should be room for recognising if an adviser has an extensive experience (without necessarily having the paperwork to prove it), said Bonham-Carter. Can RDR disenfranchise people from saving if they cannot afford the time or money to pay for advice? asked Tennant. That is a real risk, replied Bonham-Carter.
Moving from RDR to questions on the ageing population and increasing life expectancy, Tennant asked if the fund management industry has made a product shift to accommodate rising longevity. The industry is just starting to get its head around the need to cater for longer lives, and how to allocate assets for such situations, and to assess the cost of the capital protection that this demographic trend calls for, Bonham-Carter responded. Increased longevity means that most people's expectation of how long their pension will last them is at the moment too high, he added. Simple mathematics say that with longer life come longer working years.
