I don’t waste much time feeling sorry for fund managers. It’s no secret that I think it is the most overpaid job in the land. When I meet heart surgeons who earn a fraction of a fund manager’s salary it makes me think that somewhere along the line we have gone very badly wrong.
But still I did feel just a tiny twinge of sympathy for a fund manager whom I met last week. “I’m very well paid”, he began with commendable honesty, “but there are times when I get so frustrated that I wish I had stayed at home”.
“Tell me about it”, I offered in my best agony aunt tones. It turned out to be a pretty sorry tale.
I almost feel sorry for this fund manager
“Well, the starting point is this”, he sighed. “The Financial Services Authority requires us to define the investment objectives of our clients. For example, these might be ‘high income’ or ‘capital growth’ or ‘capital preservation’. That is not new. But now we have to do exactly the same for all clients that fall into the same category.”
“It never used to be like this”, he went on. “Everybody knew that no two clients were exactly the same. Clients started with a different list of shares, they contributed and withdrew cash at different times and it was impossible for each portfolio to be alike. Inevitably, by the end of the year some portfolios had performed marginally better than others, but the clients understood that and we tried our best to be fair to everybody and to favour no-one.”
“But now, if I buy a share for one client with a certain investment objective I must buy exactly the same amount, in proportion to the size of the portfolios, for every other such client and at the very same time. Here is an example.
“I wanted to buy shares in Craneware. I had learnt of the great prospects for its US hospital billing software and wanted my clients to benefit. The share price was £4 but I found that I could only buy 5,000 shares. In the old days I would have assigned these to one of my clients before setting about buying more.
“But now the FSA’s decree forces me to split this 5,000 share parcel across all my clients. They would have ended up with a few shares each. I could have carried on buying 5,000 shares at a time gradually building up holdings, but then my clients would have been getting a succession of contract notes and the dealing charges would have mounted up.
“So instead I made it known that I wanted to buy 50,000 shares. Three weeks later a line of stock became available, and I was able to buy this amount. But instead of paying prices starting at £4 per share, the share price by this time was £5.20.”
So thanks to the Financial Services Authority it sounds like the clients of this fund manager have ended up with one that is fair to all but nothing like so good.
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Why fund managers’ hands are tied
I find this quite depressing, and all too typical of the modern world. Rather than doing something useful like catching insider dealers, the public servants of the FSA (annual budget £491m) seem intent upon ensuring that no person can gain any sort of advantage.
A few weeks ago I told you how the FSA is desperate to stop companies from talking to journalists and to confine their communications with the outside world to bland corporate announcement of the “We look forward to the future with confidence” variety. God forbid that anyone should actually get hold of the truth before the company and its advisers can present the official version!
What is the answer?
Look after your own money!
Well, obviously it’s not always a good idea to hand over your money to a fund manager. I have told you repeatedly that their high salaries come at your expense. Now you know that even when he sees a good deal for his clients the fund manager is prevented from taking advantage.
So why not manage your own portfolio? Buy your own shares and if by your hard work and opportunism you gain an advantage – well, good for you!
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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