Investors deserve better. Active fund managers play an important part in the market and can hold chief executives and boards to account on issues such as pay and strategy. Ordinary savers need to have faith that the investment industry works for them.
Fund liquidity has again come to the fore as a risk. The recent decision by M&G to bar withdrawals from its UK property fund underlined the fact that open-ended funds can be the wrong home for illiquid assets — if investors want out, the managers must have ready cash available to return their money. Similarly, the June suspension of Mr Woodford's Equity Income Fund to protect it from a wave of unsustainable withdrawals prompted regulators across Europe to launch probes into fund liquidity.
In the UK, the regulator must take some of the blame for the recent failures. The Financial Conduct Authority, under Andrew Bailey, the incoming governor of the Bank of England, has been slow to act. Long-awaited rules published in September aimed at protecting investors in open-ended funds invested in illiquid assets will not take effect until September 2020. Greater transparency is required; ordinary investors do not have enough information to foresee the risks. The industry must regain public trust.
There is some reason for cheer. Stockpickers who specialise in small and mid-cap US companies secured a rare victory over index trackers in the 12 months to the end of June. During that period, 60 per cent of actively managed small and mid-cap stock funds beat the indices they are measured against, net of fees, according to data from S&P Global.
The best opportunity for active fund managers to prove their worth may come in the next financial downturn. The record-breaking current bull market will run out eventually. If there is a significant correction, stockpickers need to show they can beat the index funds. The best outcome for the active funds industry would be if 2019 were remembered simply as one that put some bad managers out of business.
Written by: FT Editorial Board
© Financial Times 2020