We have reservations about traditional active investment managers because their approach to investing has delivered consistently poor results for investors over many years and is based on a set of investment and economic principles which do not appear to stand up to scrutiny.
Examples include the myths that they can exploit inefficiencies in prices on a regular basis, that they can 'time' the entry and exit of markets and have special stock picking abilities. Each of these beliefs, held widely by active managers themselves and the public, thanks largely to expensive marketing campaigns, would seem to be without foundation.
Chamberlyns does not believe that active fund managers can predict the future, nor do we believe that they can accurately time buying and selling decisions, nor consistently beat equity market returns by using imaginary skills and insights which 'ordinary people' do not possess. Ultimately, we do not believe these things because all the evidence tells us we shouldn't.
"The idea that any single individual can beat the market is extraordinarily unlikely. Yet the market is full of people who think they can do it and full of other people who believe them." Daniel H. Kahneman, 2002 Nobel Laureate in Economics
We do, however, believe the proven facts that it is the asset classes themselves that deliver investment returns rather than active managers and around 65% of all active managers deliver a lower return for their investors than the equity markets produce as a result of their misguided, expensive approach to investing and their excessive fees.
Indeed, we are also of the view that many active investment managers are simply closet index trackers, holding a range of stocks and shares in their funds which are remarkably similar to the equity markets as a whole, yet they charge far more than a typical low-cost tracker fund for doing so.
Why would they operate in this way? Because the active management industry is judged on figures and on how managers perform relative to a particular benchmark and as a result, they cannot risk underperforming the benchmark rate of return by too great an amount, so they prevent this from happening by holding a broad, market-wide portfolio of equities in order to capture the available returns. Essentially, then, they follow a tried and tested passive approach to investing, yet charge the high fees associated with so-called 'specialist' 'active' management.
In our view, the principles and facts in favour of passively managed, index-type investment funds are undisputable - and in the interests of brevity and simplicity, only a few of them are outlined on our website - so why do the vast majority of the clients of 'Financial Advisers' never get to experience the benefits of them?
The answer must surely lie in one or more of the following assertions:
- Because their 'Financial Adviser' is happy to take an intellectually lazy approach to constructing and monitoring their clients' investment portfolios, in not questioning the performance active investment managers have been delivering
- Because their 'Financial Adviser' is not even aware of the fact there is an alternative, modern, low-cost way to capture returns and deliver an investment strategy for their clients
- Because even though their 'Financial Adviser' is aware of the existence of low-cost, passively managed investment funds and understands the evidence which supports their use, they are not sufficiently committed to working in their clients' best interests to do anything about it
- Because, from a more cynical point of view, there is no financial benefit to their 'Financial Adviser' in recommending them to their clients
In respect of the latter point, this is because as a general rule, passively managed, index-type funds do not pay commissions and since this is how most 'Financial Advisers' are paid, it is not difficult to surmise that there might well be a conflict of interest between what is best for the client and what is best for the 'advisers'.
At Chamberlyns, we construct investment portfolios for our clients from a range of low cost, passively managed, institutional asset class funds, to which only a select group of fee-only advisory practices in the UK have been granted access and which are not usually available to retail investors.
We also go to great lengths to make sure our clients are 'educated' properly about investing, about risk and about expected returns, so that they have a good understanding of the nature of their investments and are not put in the position of facing unexpected and unwelcome surprises.
Furthermore, we do not try to predict the future and we do not promise things which cannot be guaranteed. Instead we try to provide a very different and enjoyable investment experience which you will not receive from most advisory practices.