Neil Collins’ Notebook – Stockpicking: a dying art?

At first sight, it looks like a near-certain way to lose money. An index-tracking fund waits until a share has risen far enough to get into the fund’s chosen index, and then buys it. Conversely, when a price falls so far the share drops out of the index, the fund then sells it. Surely, an intelligent investor can beat that?

Apparently not. According to a deep analysis by the Financial Times, actively-managed investment funds struggle to beat their benchmarks. Over five years, only a quarter do so, and over 15 years it’s closer to one in 10. The figures relate to the US, but there is no reason to believe the picture is much different in the UK.

It’s a grim indictment of the traditional fund management industry. The long-term gains from running active funds accrue almost entirely to the managers, rather than to the punters whose capital they are using. The managers deny this, of course, but the investors have noticed, and are voting with their money, buying trackers or Exchange Traded Funds and selling out of the actively-managed competition.

The switchers have concluded that the fees saved from buying a low-cost ETF outweigh the talent of a highly-paid fund manager. There are exceptions, of course, and all fees are coming down, but cutting them is a slow and painful process. After all, persuading a successful active manager to reduce his fee looks uncomfortably like punishment for good behaviour.

The industry’s response has been consolidation and investment in cost-saving technology. Yet this can only go so far if the underlying problem is that consistent out-performance is very rare. If the past really isn’t a good guide to the future (as the sales literature must state) then there is not even any point in trying to find that manager.

Curiously, as the trackers and the ETFs continue to soak up investors’ capital – Morningstar estimates that $9tn is now in passively-managed funds – this should give the clever active manager an edge over her passive competitors. The active breed desperately need a reason to justify their existence, since the last one, that they would outperform in turbulent markets, has been thoroughly disproved this year, on both sides of the Atlantic.

Nobody will weep for the demise of the overpaid, just about competent fund manager, but the trend is taking investors still further away from involvement with the ultimate users of their capital. Choosing a fund whose investment principles coincide with your view of what businesses should or shouldn’t do is a poor substitute for directly backing individual companies.

Those investors who pick their own shares are a dwindling minority of the market – but at least we save the management fees, and there’s comfort in knowing that there are many professionals whose stock-picking is even worse.

Dear Chancellor: grab it while you can

It did not take long for the media guns to train their sights on the Office of Tax Simplification’s suggestions for reforming capital gains tax. The Daily Mail caught the tone: “Those who inherit property, second-home owners, buy-to-let landlords and entrepreneurs who sell their businesses could be among the hardest hit by the proposed tax grab.”

Well, yes, they sound like best candidates for the grab which everyone agrees is going to be needed one day. CGT could certainly do with some simplification. Today’s cat’s-cradle of rates, exemptions and allowances is a tax accountant’s delight, which is why it raises just £8bn, compared to the £180bn from income tax.

Bill Dodwell, the report’s author, has spent his working life immersed in tax, but one proposal, removing the capital gains reset on death, would cause no end of misery. The price paid by the deceased for a long-held asset is probably lost, or the taxman could argue that a property upgrade was mere maintenance.

Rising shares and house prices have shown that we are not in all this Covid crisis together. Those of us on the Mail’s list should pay more.

Not Rolling in it

Can it really be only six weeks since Rolls-Royce was gasping for financial air, launching a “recapitalisation package” to raise £2bn from a 10-for-3 rescue rights issue? indeed it can, yet this week the aero-engine maker was bouncing, Tiggerishly, with excitement over small nuclear reactors.

To read one of this strange year’s most bizarre press releases, Rolls bangs on about the wonders of these things, which have been powering nuclear submarines for decades, to keep the landlubbers’ lights on. For students of Eng. Lang,, the release is all written in the future perfect, rather than the future conditional, even though the venture is highly conditional, needing a £2bn bung from the rest of us for starters.

Leading this sort of adventure is just what the Rolls rescuers do not want to hear. Making aero-engines is difficult and hugely expensive (even when they come up to spec.) and all the money so recently raised will be needed to keep the company in the game.

There is clearly quite a lot of expertise from making the reactors, but Rolls simply cannot afford another line of business. Besides, the history of UK nuclear reactors is one of constant disappointment, as the latest game-changer bursts its budget.

Small reactors, by definition, cannot match the economies of scale from big ones, and the savings from reproducing the same design all over the place depend on on how happy we are to have one in the next street. About as happy as Rolls shareholders would be to fund them, probably. These units may have a future, but if ever there was a time for the company to stick to its knitting, this is surely it.