If you opt for a passively-managed fund you can expect a robot or, more accurately, an algorithm to be running your fund with all the finesse of one of those dreadful self-service machines they insist on installing in supermarkets.
Henderson got a bit confused about this difference recently and ended up having its collar felt by the boys and girls from the FCA.
You can read the story here FCA fines Henderson £1.87m for client failings but the gist was that the firm decided to move a couple of actively-managed funds to a tracking model. It told insitutional investors but seemingly ‘forgot’ to mention it to retail investors…for five years. Now this is a bit of an oversight.
The retail investors, no doubt some advised by Financial Planners, put their hard-earned wedge into what was in effect a closet tracker but were not made aware of this change. The blunder cost Henderson, now part of Janus Henderson, just under £2m in fines.
The move is significant for a few reasons. It sends a warning short over the bow of many fund managers, who will no doubt be checking whether they have been inadvertently running closet trackers, and it also opens up the issues around investment transparency and whether investors really know where their money is going and how it is managed.
A common view I’ve heard is that investors treat funds and investment trusts a bit like their cars. They don’t really know how the engine works but they know the car goes from A to B most of the time without any problems and that’s enough for them.
This is a fair point but ignores the fact that far too many funds are opaquely managed. A number of fund failures over the years have fallen foul of putting their money into investments few clients knew about. We could perhaps ask Mr Woodford to comment on this one but he’s not alone.
Fund managers I’ve spoken to have always insisted that they need a certain amount of, shall we say, secrecy to operate. Particularly with large funds tipping off the markets in advance that you are planning to dump a large holding in a major stock is pretty dumb. I get that. But this must change.
The independent and impartial scrutiny of funds by trustees and custodians is sadly lacking and I believe the regulators are just waking up to that fact. Funds need far better auditing and issues must be raised straightaway. Waiting for errors of judgment to come to light one day is simply not good enough.
Investors deserve to be be better informed and better treated.
Kevin O’Donnell is editor of Financial Planning Today and a financial journalist with 30 years experience. This topical comment on the Financial Planning news appears most weeks.