At least he didn’t take sides. Former Gartmore Investment Management chairman Paul Myners, who advised the U.K. Treasury on reducing fund management costs, laid into both the buy and the sell sides at Institutional Investor’s All-Europe Research Team awards dinner in London last month.
By Tom Buerkle
March 2003
Institutional Investor Magazine
Keynote speaker Myners was less controversial than New York State Attorney General Eliot Spitzer, who used the occasion of II’s All-America Research Team dinner in New York last November to rip into U.S. equity analysts. Nevertheless, Myners rapped investment managers for not pursuing cost containment more vigorously, and he warned analysts for investment banks that their work is in danger of becoming irrelevant. He even got in a few stinging jabs at active equity management, implying that most of the time it’s a waste of money.
Myners saved his harshest words for fund managers. This is, after all, the man who stirred up a tempest two years ago when he recommended in a government-commissioned report that asset managers pay for investment bank research out of pocket rather than automatically pass the cost on to clients. Myners decried the “deathly silence” from the investment industry that greeted his proposal. This showed, he said, that the buy side “neither had the appetite nor the financial resources nor the moral wish to rise to that challenge.”
More controversially, Myners broadened his attack to include active equity management. Estimating the total cost of stock trading in the City at more than £2.5 billion ($3.9 billion) a year in commissions, market impact, stamp duty and other items, Myners called it a “huge tax on investors” when most fund managers are underperforming the market.
His solution? Asset managers should be required to compare their returns not only to those of their peers and the equity indexes but also against a simple buy-and-hold strategy. That would focus attention on transaction costs and might encourage managers to pay greater heed to the governance and performance of the companies they hold.
Some fund managers were white-hot over the criticism. It’s “utterly ludicrous” to suggest that fund managers are not bearing down on costs, fumed Keith Jones, chief executive of Morley Fund Management, the asset management arm of U.K. insurer Aviva. He pointed out that in the past five years, Morley has doubled the percentage of trades it crosses over -- that is, swaps among the portfolios in its fund family -- to avoid transaction costs.
Richard Saunders, chief executive of the U.K.'s Investment Management Association, calculates that Myners’ £2.5 billion estimate for transaction costs amounts to just 25 basis points a year on the roughly £1 trillion in assets of U.K. pension funds. Calling it a tax is plain “dotty,” Saunders says. “You do get a return for it. It’s called a market. Having an equity market has all sorts of benefits for investors. You get liquidity, and you get price.”
The idea that fund managers should shun active management at a time when economic and political turbulence are increasing market volatility is misguided, adds Mark Pignatelli, chief investment officer for Schroders. “You are being asked by a client to look out for his fiduciary interest. As Keynes said, ‘When the world changes, I change my view. What do you do?’”
The debate over active management nevertheless seems sure to intensify. Under a code of conduct worked out in 2002 between the Investment Management Association and Britain’s National Association of Pension Funds, fund managers will have to provide clients with a detailed breakdown of management costs, including commissions and other transaction expenses. And the Financial Services Authority, under prodding from the U.K. Treasury, which broadly shares Myners’ views, intends to issue this spring a consultation document on commission unbundling that could lead to regulatory action.
Some fund managers acknowledge that the industry needs more self-evaluation. The day after the dinner, Robert Alster, director of European growth research at Alliance Capital, which manages about $7 billion in European equities, asked his staff to calculate how Alliance’s funds would have performed on a buy-and-hold basis going back to the year 2000. The results aren’t in yet, but if they prove Myners right that active management usually subtracts value, “that would be a real shock,” Alster says. “I would have to sit down and think about what I’m doing.”
