Chairman of the Investment Management Association, Robert Jenkins, gave his members something of an ear-bashing at their recent annual dinner.

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Most trade associations see their job as being to spend their time haranguing those outside their industry. It is much rarer to find them addressing their own membership and seeking to put them right on some fundamental aspects of the way they do business. All the more credit therefore to Robert Jenkins, the current chairman of the Investment Management Association, the UK fund industry’s lobby group, for giving his members something of an ear-bashing at their recent annual dinner.

By announcing that his remarks were merely “trite observations” that everybody in the room already knew, Mr Jenkins cleverly attempted to draw the sting from what was essentially a pointed (and all too well justified) critique of the fund industry’s behaviour. It is precisely the fact that almost everybody in the funds business does know the reality of how funds are created and sold which is the most disturbing aspect of the issue.

Of Mr Jenkins’ five “trite” observations, two seemed to me to be particularly germane. One was to question why so many firms in the investment management business regards assets under management as the key criterion of performance. One reason is obviously that big numbers clearly convey scale that many fund managers in truth simply do not have. It sounds so much grander to be a business with billions under management than a tiddler with just a handful of millions in profit – and little or nothing to talk about, in many cases, by way of added value.

In fact, suggested Mr Jenkins, because the great majority of the assets under management in any typical investment management firm ultimately belong to other people, it might more properly make sense to refer to them as “liabilities under management”. An industry with £3 trillion of liabilities would clearly sound a lot less impressive than a business with £3 trillion under management; and it might even make the industry think a bit harder before launching funds that merely exploit fashionable fads onto the market.

The compelling economic reason however is that, as everyone knows, the ad valorem fee system embedded in standard industry practice is what enables fund managers to be paid for exposing clients’ money to market rises for which in honesty they can take little or no credit.  And if that was not bad enough, the sin of commission is the collective willingness of the funds business to take new money off investors at the worst points in the market cycle – typically, when asset classes have recently done exceptionally well, but are entering a period when the reverse inevitably becomes more likely.

Internet funds in 2000 and property funds in 2007 are only the most extreme examples of this cynical and offensive behaviour, in which fund promoters seek to extract millions from gullible, poorly informed investors, employing a prospectus that they know (or should know) to be deeply flawed. This cynicism might matter less were it not for the fact that so many recent attempts by the fund industry to redress the balance through innovation have proved to be such a disappointment in practice. 130-30 funds, absolute returns funds and lifestyle funds have all, at least on the evidence to date, failed to live up to the claims that were originally made for them.

If doctors prescribed medicines to patients in the knowledge that they were more likely to do harm than good, and collected a commission for every drug they sold in this way, it would rightly be regarded as scandalous behaviour.  When it happens in the fund business, nobody seems to blink an eyelid – partly no doubt because professional standards are low, and partly because there is no equivalent of the Hippocratic Oath by which practitioners can look to guide their actions.

For all its many faults, the FSA’s Treating Customers Fairly initiative is at least a well-intentioned attempt to bring some principles to bear on the way that fund companies behave. The principles that they represent are mostly things that a well-regulated professional business should be seeking to introduce of its own accord, without thinking.




Jonathan Davis
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