A & M Wealth Management – Summer Newsletter 2015
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A & M Wealth Management – Summer Newsletter 2015

A & M Wealth Management – Summer Newsletter 2015

A recent study into investment trends reported that more than $3 trillion is invested in Exchange Traded Funds (ETF`s), globally. Research from ratings agency Morningstar, also confirmed that active US Equity funds suffered outflows totalling $138 billion during the past year, while passive funds received $178 billion.


A report by the S&P Dow Jones Indices shows that the largest increase in passive investing has taken place during the past 3 years. Since 2012, the amount invested in Index funds and ETF`s in the US has more than doubled from $400 to $800 billion. The trend in the UK is broadly similar.

So, what is the difference between active and passive investing? Why is passive investing suddenly becoming so popular and should all future strategies be based on passive investing?

Active v Passive

Collective Investment funds such as Unit Trusts, Open Ended Investment Companies and Capital Investment Bonds have been the traditional way for ordinary investors to gain access to specialist investment expertise. Investor’s capital is pooled with that of other investors, to create a large fund that can invest across a greater range of investment assets. Fund managers, backed up by research analysts and economists, combine their expertise to buy and sell stocks and shares, within the fund, with the aim of maximising returns and minimising risks. The strategy is known as “active” investing and the investment manager’s charge fees for their services.

Passive investing does not utilise the expertise of investment professionals and is based on computer modelling. For example, the UK FTSE 100 is an index made up of the largest 100 companies, by capitalisation, in the UK. An Index Tracker fund would simply buy the shares of the 100 companies represented in the index. The number of shares purchased would reflect the weighting of each particular company within the index. There are different types of “passive” funds but the principal is broadly the same. Because there is no investment management involved, investment costs are much lower than for active managed funds.

Why Passive, Why Now?

During recent years, investment management and financial advice have come under considerable scrutiny. Appointed regulators, consumer groups and the media have been active campaigners for change and this resulted in the introduction of the Retail Distribution Review (RDR), in the UK in 2013. Similar legislation now exists in most developed markets.

Transparency was at the heart of RDR, with particular emphasis on the charges and costs involved for investment management and financial advice. As a result, charges are now levied individually by investment managers, financial advisers and associated third parties and potential investors are now better able to determine whether the cost of the advice and services being provided can be justified.

Investment management fees have remained in the spotlight as investors are keen to ensure that they are getting value for money. Simply selecting the cheapest products is a flawed concept, however, recent independent surveys have highlighted a very important and relevant fact. That is that, most active investment managers fail to consistently outperform their relative benchmark. In other words, despite charging management fees, they often fail to outperform the return provided by “passive” investment funds or the relevant benchmark index.

The recent S&P Dow Jones Indices survey reported that 82% of actively managed funds failed to beat the index over the past 10 years. The story is similar in most global equity markets.

So, with many active funds underperforming the benchmark and charging higher fees for this mediocrity, would it not be better to simply abandon active in favour of passive investment strategies? Although there has been a significant shift in this direction, I do not support this theory.

An Index Tracker or ETF fund will only ever provide an annual average investment return, below the benchmark index. Investment fees, however, small, mean that the return will be, the index – fees = below average performance. For investors with small amounts to invest, or individuals who are simply seeking a better return than cash, these returns may be sufficient. However, for investors such as claimants of personal injury settlements and other investors who want or need their investments to provide much better returns, this strategy may not be sufficient.

It is what you get from an investment strategy that is of paramount importance. An investment return of 8% per annum, net of 2% investment fees is better than an investment return of 4% net of a 0.5% fee! It is no coincidence that the better performing fund groups have teams of researchers and economists to support the investment managers.

The S&P Dow Jones Indices survey highlighted the fact that 82% of active funds failed to beat the index, but, more importantly, it confirmed that 18% of the active managed funds did consistently beat the index and by a significant margin. In most industries and commercial sectors, the average service or product is typically mediocre and it is the smaller number of outperformers who attract the most customers and grow successfully. Think Apple, Microsoft, Mercedes etc. In situations like these, customers seek out the best products and ignore the rest.

As independent financial advisers we do the same. Our job is to research and review investment markets to ensure that our clients only invest in the outperformers. We also keep recommendations under regular review to ensure that above average performance is maintained. This requires an in depth knowledge of investment markets backed up by comprehensive research and analysis on an ongoing basis. Many financial advisers either lack the knowledge or the desire to provide such a service, but at A&M Wealth Management Ltd, we believe that it is our duty. Claimants who rely on their investments to secure their financial future require and deserve more.

So, an actively managed portfolio utilising the expertise of the top 18% will consistently outperform a passive strategy.

It is also important to consider overall value as well as investment costs and charges. It is what you get from an investment strategy that is of paramount importance. An investment return of 8% per annum, net of 2% investment fees is better than an investment return of 4% net of a 0.5% fee! It is no coincidence that the better performing fund groups have teams of researchers and economists to support the investment managers. Reduced fees may result in reduced expertise.

A hugely significant factor that seems to have been ignored by the consumer champions is investment risk.

Passive funds buy and hold the shares of whichever companies constitute the particular index being replicated, regardless of the price or value of the shares. By the time a company enters a particular sector such as the FTSE 100, the share price may already have become expensive or overvalued. The index has to buy it anyway. The value may already have gone. Equally, a company that suffers problems and sees the share price fall would still be held in the passive fund unless it fell out of the index. A recent example is the London Stock Exchange listed Oil company Afren, which went from a market capitalisation of £1.8 billion in 2014, to £36 million today. A passive fund holding onto that stock would have incurred significant losses. By contrast an active fund manager is free to buy and sell stocks as he/she deems appropriate, always seeking value.

It is also interesting to discover that the huge shift from active to passive investing has taken place since 2012 as US and UK stock markets have reached their highest ever levels. How expensive passive investing turns out to be for this period will be determined not by fees but by future investment returns. Investment charges are a factor but the price paid for shares and the subsequent sale value can determine investment returns.

The introduction and development of passive funds is a welcome concept and there is a place for them in carefully constructed portfolios and they may offer better value for smaller investors. However, how and when to use them requires the same consideration as any other investment strategy and the idea that passive investing should replace active is flawed! We will continue to research and monitor all investment solutions and make recommendations accordingly.

At A&M Wealth Management Ltd our clients continue to benefit from truly independent advice and above average returns. Meanwhile on cliff tops throughout the western world, encouraged by media and financial “experts”, the lemmings continue to gather!


Intermediate between the old and new Bill of Costs Format

Recently, we are increasingly finding that on matters where there is a costs management order, firms are having difficulty proving each approved budget phase has been adhered to whilst using the current Bill of Costs format.

During a Detailed Assessment hearing the District Judge must conclude that the costs being claimed in these proceedings correlate with the approved budget and costs management order. Although there is no obligation at the moment to show this, parties are being encouraged to serve updated budgets with the Bill. Kevin Edward Costs therefore now offer this as part of our standard service, and include detailed breakdowns, so it is coherently displayed that the budget has not been breached.  Whilst doing this we can then of course inform our clients if any phases have been exceeded and advise accordingly.

To find out more about our services please contact Alec Hughes on 0151 728 3210 or alec.hughes@kevinedward.co.uk