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Lord Myners renews attack on stock-pickers

Lord Myners has repeated calls for regulators to introduce an “inertia index” as a benchmark for active fund managers, amid concerns about the performance of those claiming to use skill to beat the markets.

The former City minister told Financial News that such an index would allow investors to see how a fund performs if the active manager leaves holdings untouched.

Active fund managers, who charge higher fees on the promise of outperformance, typically measure themselves against an index and competitor funds. Myners estimates that more than half would have produced superior returns over medium-term horizons if they had not traded in and out of stocks.

He said the UK’s market regulator, the Financial Conduct Authority, should be worried about the active investment model. It does not produce the outcomes expected, he added.

Myners said: “The resistance to the idea [of an inertia tax] I have met when discussing it with fund managers obliges me to conclude that they know the exercise will convey an uncomfortable message.

“The FCA should say that this will be a regulatory requirement but express a wish to work with actuaries, accountants and investment managers to agree a standardised methodology.”

An inertia index was a chance for the UK to take the lead in this area, according to the former chairman of Marks & Spencer.

The FCA said in its asset management market study in June that the industry must introduce sweeping reforms to improve transparency and returns. The regulator is paying particular attention to the fees being charged investors.

According to figures published this week by S&P Dow Jones, only 28% of sterling-denominated active funds in the UK outperformed S&P’s broad market index for UK equities over 10 years. However, the data provider did find signs of significant improvement among both UK and European funds this year.

Some believe the performance of active managers will continue to improve as central banks withdraw quantitative easing measures that have sent equities soaring and pushed investors into low-cost passive funds that simply track markets.

This appetite for passive products has been one of the defining investment trends of the last decade.

Exchange traded funds now hold more than $4tn of investors’ money globally — around $1tn more than hedge funds — according to research from ETFGI. BlackRock’s iShares ETF business alone took in new money at a rate of more than $1bn a day, net, during the second quarter.

Myners said active managers should change their approach to combat the rise in passive management by creating higher conviction and less diversified portfolios, and by holding back bonuses for portfolio managers who would have seen better returns had they done nothing.

A full interview, An Audience With Lord Myners, will appear on Monday, October 2

To contact the author of this story with feedback or news, email Tabby Kinder

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