Can You Trust the Fund Industry?

Holly Black: Welcome to the Morningstar Series "Ask the Expert". I'm Holly Black with me is Jon Miller from the Morningstar Manager Research team. Hello.

Jonathan Miller: Hello Holly.

Black: So, it's been a bit of a strange couple of months in fund management, we've seen a number of issues come up that I think is probably rocking investor's trust in the industry. What's your take on that as an analyst?

Miller: Yeah, I think you're right, we are built on trust, people are saving for the long term and when there is a breakdown in trust, it affects confidence. And you see people probably doing potentially silly things with their money.

Now I think the biggest issue we've seen is probably Neil Woodford, let's be honest. Where liquidity and a manager really thinking about where he saw his own skills and didn't have a wider view of liquidity and issues within his fund are the things that have come to the fore. There was a BBC program called Panorama that was aired, and it went into a bit more detail. We saw some people from the FCA. The FCA investigating the illiquid holdings or unquoted very early on, you ask why wasn't that continually monitored from close. So, it's part of the postmortem, where we need to look and learn. I think we should also look and see where investors are today. In the UK, I think we're actually in a pretty good place for investors. We can come on to a few points around that. But I think we just need to look closely at how we rebuild the trust. But also look at the positives to ensure that people have faith in what they can do and invest over the long term for their future and their goals.

Black: But isn't this going to be too late for some people? They'll say, no, I've been reading all these newspaper front pages and they say, take my money, stuff it under the mattress. These guys are just secretly squirrelling away and doing really nefarious things.

Miller: Yeah, and you think fair enough, that's how people think. But we need to educate people to start with about why keeping cash under the mattress doesn't help you in terms of real returns over the long term, your future, your goals. There are ways you can self-invest now, kind of regulation has pushed that in a way to an extent maybe with pension freedoms, for example. But around that, there's research that can be done, there are advisers out there that are skilled, that can help people on their lifetime planning and coaching to achieve those goals. And, you know, it's also not about putting all your eggs in one basket. It's like your friend down the pub, he says, I know about this gold miner that's going to double its money in the next six months. That's not the way we should be thinking. We should be looking at long term compounding, to increase your savings and ability to spend in the future. And that's where we need to rebuild by education and trust and confidence in people.

Black: That's all very well saying it and knowing the theory, but when you see your money losing value, it's really hard to keep that in mind. And I think something that's come up in recent weeks is some investors feel that the regulator and the fund houses should be doing more to protect them.

Miller: There is an initiative around that in terms of fund boards and independent non-executive directors which should be looking more closely if funds are achieving their outcomes. But you know, if people are worried about funds performing, underperforming. The TV programme talked about rock star fund managers. We have got to move away from this star manager culture, we actually like groups where there's teams involved and where there might be change where there are people still coming through the ranks.

But you know, people can invest passively. So that means you can track an index without worrying if fund's going to underperform or outperform. And the beauty is you can do that for 0.05% or 0.1% to replicate the FTSE All Share today. So, you know, in terms of bringing us to where are investors today, I think they are in a good place because you've got a load of options there that have reduced fees if you want to go passive and you can invest in multi asset funds. So, these are funds that invest in equities, bonds and other diversified areas to create a diversified portfolio. Some of those invest in passive funds only, so you can buy these funds for 0.3%.

You know, in the past what we had were fund of funds, they still exist today but are getting less flow, charging 1.8%. So, look at that gap you've got today. Still, I'd say in terms of doing your research, those index tracking funds, the multi asset ones are doing different things. So, you need to look behind the bonnet and under the bonnet to see what those are because there's different things in terms of execution that are happening. So, you know, it's all about doing your research still. But fundamentally, when you look at the way the fees are coming down, the way passives are taking their hold here. And still there's some good active managers out there, charging less and you got clean share classes here. I think it really is a good time to be an investor.

Black: So, there has been a lot of progress and transparency and cost all getting better. But there's still room to move.

Miller: Of course, and we shouldn't, what I'm trying to say is there are some positives, but we shouldn't brush things under the carpet if there are issues. Those known issues should be looked at. You know, as I said, the postmortem with the regulator those things should be, it stands out in the future, how much unquoted you can use in open ended funds. Should they be served only in closed ended funds, all these things are relevant, topical, want to help investors. But we also should focus on where there are some positives that can help people rather than shy away completely from having to help themselves as well and getting advice on how to save for their futures.

Black: Jon, thanks so much for your time.

Miller: Pleasure.

Black: And thanks for joining us.