Should you save more? Of course you should. So why don’t you? JP Morgan Chase thinks it knows the answer, says Anthony Hilton in the Evening Standard. In a report out this week, they claim that people in Britain don’t save because “they don’t really understand how to go about it”. I suspect this is nonsense.
Today our savings rate is around 3%. Back in the 1980s it was more like 10%. Did we somehow understand more then than we do now? Of course not. The truth is that an awful lot of people in the UK don’t save not because they are too dim to open a bank account, but because they get paid the minimum wage.
After paying all Gordon Brown’s rapacious taxes, their out-of-control mortgage or rent, buying a few bus tickets and eating, they’re lucky not to be bankrupt. Saving is a distant dream. And the rest of the country know perfectly well how to save – they just, as Hilton points out, don’t much like “the way they are treated when they do”.
The history of the last 30 years shows that the real returns from the long bull market have gone not to investors, but to financial services companies in the form of ludicrous commissions to the advisers who sell funds to would-be savers; “grossly inflated salaries to fund managers most of whom show no particular flair”; and the overly high costs of “shoddy and laborious administration”. The result? “The average return on investors’ savings is typically less than half of the improvement in the market.” No wonder so many people, however idiotic it might have looked to the bears, pinned their dreams on the property market, not the stockmarket.
There is a view in the fund management industry that while things aren’t so hot now, there are good times ahead: our savings rate is currently so low that we must save more, they say. They then go on to assume that means we will save with them – this is presumably why JP Morgan is putting out reports like this. But I think we probably won’t. The internet, the availability of simple trading accounts, self-select Isa wrappers and cheap SIPP structures and, in particular, the rise of the exchange-traded fund mean we don’t have to. If I was a fund manager, I’d be more scared of ETFs than of the credit crunch.
The average managed fund comes with a nasty up-front fee (you can often get much of it rebated, but it’s still there) and an annual management fee of 1%-1.5%. Buy a fund that considers itself somehow special (perhaps it’s manager is young and stupid enough to believe he can consistently make absolute returns) and you’ll find yourself thinking that 1.5% looks cheap. Not so if you ignore fund managers entirely.
At our Roundtable this week (see next week’s Moneyweek for the transcript), Tim Price tipped an ETF, a little apologetically. It’s one of the more expensive ones, he said – the fee is 0.6%. Most charge less, which means that an active manager would have to outperform the market tracked by an ETF by at least 1% to be worth buying instead. And that, if history is any guide, doesn’t seem very likely.