I was copied into some interesting emails this week referring to the publication of research by Towers Watson. They have been reproduced below – first from 10X chairman Dave Woollam and then his company’s CEO Steve Nathan. The cost cutting vigilantes are not targeting active managers per se, rather they’re arguing that there are just far too many of them. Go figure. – AH
From Dave Woollam:
I have forwarded you this email from Steve Nathan (CEO of 10X Investments) together with a short but very powerful research report issued recently by Towers Watson. The Active vs. Passive investment management debate has been receiving considerable attention in the financial press and internet community with each side throwing arguments for and against each style. The key issue that is often missed however is that the issue is not about Active vs. Passive but rather one of Cost. The real question that needs to be asked is whether investors are getting a fair deal from asset managers in return for acting as custodians of their savings.
It is a given fact that over the normal working life of an individual, a 2% additional cost of managing your investment savings will result in an approx 40% lower final maturity value at retirement on an inflation adjusted basis and this will materially affect your chance of retiring with an adequate pension or annuity. It gets even worse if you then convert your lump sum into a high cost living annuity. Over you entire life you could see approx. half of your real savings disappearing in fees.
The research paper puts this concept forward in a clear and simple way and illustrates the problem very cleverly. Over the last decade we have seen both Banks and Insurers coming under increasing scrutiny for their high costs, conflicts of interests and lack of transparency. It is my opinion that the asset managers will be next!! The industry has become enormously powerful and lucrative, however I believe will increasingly come under scrutiny for level of fees charged for providing these services.
For purposes of full disclosure, I am a significant shareholder and Chairman of 10X Investments
Frm Steve Nathan, CEO 10X Investments:
One of the world’s largest asset consultants Towers Watson, made a startling admission recently: “Only a small subset of…active managers and…hedge funds are useful to society.” They also state “shuffling of ownership rights between investors adds no value in aggregate.” This is the essential principle underlying the zero-sum nature of active management. “Index-tracking managers are useful to society because they perform the necessary oversight for minimum cost.” The authors estimate that index funds presently oversee 15% of global assets, but charge less than 2% of total fees. The other 98% of fees are charged by active managers and hedge funds. Yet the authors see only a limited benefit to society, related to the screening and pricing of new assets. They see “the excessive shuffling of ownership rights (that is, pursuit of ‘alpha’) as value destructive.”
The authors’ conclusion: “We should have less active management. Not none, but less.” Their useful services could still be rendered adequately, if active managers oversaw only 25% of assets, thereby saving owners some 40% in fees (an estimated annual saving of between R800bn and R1600bn globally).
The facts are clear – the industry’s business model is self-serving and fails most investors. This evidence is supported by research from several Nobel laureates (William Sharpe, Eugene Fama and Robert Schiller) and leading investment experts such as Warren Buffett, David Swenson (Yale) and John Bogle (Vanguard). For the industry, THIS ISSUE HAS MOVED BEYOND AN INTELLECTUAL DISCUSSION TO A MORAL DILEMMA, as Towers Watson notes “None of us is going to voluntarily ask for a 41% pay cut, but if we were really putting our clients first, we should.” They go on to call for a new moral environment that provides “the socially useful function of adapting portfolios to fit the risk level to the mission of the investor. This is an important role undertaken by the industry but is not part of our current focus.”.
At 10X we are pleased to say this is exactly what we focus on and supports our long held view that the best way for most people to invest is via a well-structured, low cost tracker fund. Since inception almost seven years ago, 10X’s life-stage tracker funds have proven to be simpler, better and cheaper than the vast majority of actively managed funds, including during the 2008 Global Financial Crises.
The good news for investors, employers and trustees is that you have no conflict or vested interest, other than to do the best for yourself, your employees or your members. We strongly encourage you to read the short Towers Watson note.
