As one elephant vanishes, at least two others appear

Steven Nathan, chief executive of 10X Investments, believes there is a way to deal with two new elephants in the room, other than the self-serving investment practices that benefit service providers at the expense of their clients.

Asset managers tend to offer a range of investment funds. A few do well and attain flagship status, but others perform poorly and settle at the wrong end of the rating table. They suffer outflows and do nothing for the manager’s reputation.

The people who were invested in the under-performing funds immediately lose sight of their historic returns and are instead presented with the more palatable performance of their new fund. They may soon forget they did not actually share in those returns. From that perspective, inattentive investors are a boon to the industry.

On average, 15% to 20% of funds disappear over a five-year period.

Such fund closures mean underlying investors lock in their losses. Those who were prepared to take a long-term view and ride out their fund manager’s period of under-performance are forced to sell low. And, invariably, they are then required to buy high because their money is transferred to a fund that has just done well.

Alternatively, it’s asset managers themselves that vanish, usually by merging with other players.

“Index investors avoid manager selection risk, the risk of choosing a manager that ends up near the bottom of the rating table and is eventually forced to close,” he says.

They simply earn the benchmark return, at low cost. Net of fees, they will fare better than the average active investor.

“When their returns flag, they don’t have to worry, because they know it’s the market, not their fund manager,” adds Nathan.

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