For & Against

Do We Need Fund Managers?

Bulle und Br
When push comes to shove, can fund mangers outperform passive funds? Source: Fotolia

Experience counts

Susanne Schier, head of Handelblatt’s investment team, says making a choice instead of just relying on the index can pay off.

Criticisms of active fund managers always sound the same. The rate of return is poor – so poor, a monkey make a better pick throwing a dart at a newspaper’s stock market pages. But it’s nonsense to be suspicious of investment professionals.

It is certainly true that active fund managers aren’t always able to beat important indexes like the DAX, the EURO STOXX 50 or the S&P 500. Many investment professionals didn’t expect such an upswing in the stock markets right after the U.S. elections last November. There, exchange-traded funds (ETFs) might have made a better profit in the short term. All the same, there are good reasons to rely on the experts.

For as long as the markets are on an upward trend, and almost all stocks are rising, it is quite easy to reap profits with a passive index fund. But in poor market phases, active managers have a better chance of limiting investors’ losses and avoiding the badly affected shares suffering most.

In times when banks and insurers are considered to show little promise, an active fund with European stocks can bring in more for investors than a passive fund that strictly relies on the EURO STOXX 50. Despite a couple of companies being relegated out of the benchmark index – last year, for example, Generali and Unicredit were dropped – the euro zone’s leading index still has many financial service providers.

Another advantage of active fund managers is that they often cultivate direct contact with the companies in which they invest, and submit lists of questions to company leaders – something a passive fund cannot do.

Investors are also better off in certain market segments when they put their trust in active managers – such as in less liquid emerging countries. ETFs are likely to have difficulties exactly reproducing a number of indexes – such as when listed companies are state-owned. Then, it can be better if an experienced manager selects the companies the fund can actually invest in.

It is also obvious, however, that active fund managers don’t work for nothing. For that reason, investors should examine fees closely when choosing a fund – the differences are often great. Finding the right fund therefore takes a bit of effort. But long-term involvement can pay off.

Huge expense, nothing to show

Robert Landgraf, deputy head of Handelsblatt’s finance section, argues that index funds can save on fees and generate large profits.

One thing is certain. Nobody needs active fund managers. Especially not investors. They do nothing but cause stress and demand hefty commissions for their services. If only their performance matched their fees. But that’s not the case.

Studies regularly show the earnings performance of active funds leave much to be desired. Private investors in particular are better served, and achieve higher earnings, with exchange-traded passive index funds. Traded funds or ETFs, for example, reproduce in exact detail the stocks of the German stock exchange index with its 30 top corporations or bond index funds on government securities, and react in tune with their price performance. They do this far better than active fund managers, and cost a fraction of the fees the human competition demands.

It’s crazy. We humans, as the crowning glory of creation, should be far superior to ETFs – an artificial creation of the financial world. Particularly in times like these when the world is hit by political and economic insecurity, there should be a role for fund managers who analyze economic activity and states, financial markets and companies and draw the right conclusions. But that’s precisely what isn’t working. Index funds perform better. The ETFs reproduce indexes, in which individual stocks, such as Lufthansa and Siemens, are bought and sold. Even active fund managers now want to profit from that and have plenty of ETFs in their funds.

That’s why robo-advisors, which automatically manage assets, are becoming tough competition for the active fund industry.

Managers won’t be missed in the analysis of companies, raw materials or currencies, either. The argument that only they can assess their strengths and weaknesses and then buy or not buy, doesn’t hold water. There are enough investment managers, wealth managers, pension funds, insurers, and hedge funds today already taking over this role and moving stock prices.

Moreover, top managers, like Larry Fink, the head of the ETF giant Blackrock, are already today telling the executive boards of DAX companies what isn’t to their liking and what has to be changed in the corporations in personal conversations or in scathing letters. In the end, active managers are a waste of time and effort. Money spent and nothing gained. It’s better to invest passively in ETFs right from the start.

 

To contact the authors: schier@handelsblatt.com, landgraf@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!