How investors are rebelling against professional money managers

By Edmund Conway Economics Last updated: January 18th, 2010

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It is hardly headline news to say we’ve all lost rather a lot of our faith in the financial Masters of the Universe during this crisis. We all know they proved just how little they knew or understood the risks they were taking, and as we can see from the recent bonus rows, their standing has diminished considerably as a result.

What I hadn’t realised is that many of people are already putting their money where their mouth is on this one. According to analysts at Goldman Sachs, over the past year or so, people have been pulling their money out of funds managed by professional investors and fund managers, and choosing instead to invest it themselves, whether in simple shares or in exchange traded funds.

The story, according to Goldman’s chief US equity strategist, David Kostin, and as told by the chart above, is that despite the 25pc increase in the stock market over the past year or so, not one dollar went into US equity funds (in fact, there was a net outflow) – and yet over the first nine months of the year there was about $225bn of direct purchases of common shares.

It represents, according to Kostin, a “repudiation of the professional investor class by individuals, who are investing in ETFs and direct purchases of stocks.”

He prefers to frame this phenomenon (which reflects the US, but may well be mirrored over here in the UK) as a sign that people are becoming more independent when it comes to their finances, plus that they are aware that there are tax advantages of investing through exchange traded funds (which can track indices and commodities, but without having to pay a fund manager to do the legwork). However, one could just as easily see it as a sign of revulsion in professional asset managers. And for good reason.

Throughout this crisis, much of the criticism over what happened has been levelled at the banks, but far less at bank investors. And while bankers are not blameless for having done far too much in the way of slicing and dicing assets, creating toxic debt and pushing sub-prime mortgages, a semi-legitimate excuse on their part is that there was demand for these toxic assets. Which indeed there was: professional investors have been given far too easy a ride for investing in some of the dross that contributed to the crisis. They have also been given too easy a ride for not monitoring the banks fiercely enough in previous years. After all, if a few more bank shareholders (and I’m talking big pension funds and asset managers here) had scrutinised the banks (which they own), they might have realised that capital and liquidity were at paper-thin levels, leaving the banks at risk of insolvency.

Against this backdrop, and given how much wealth was lost as a result, it is hardly surprising that people are steering clear of the fund managers for the time being. That sounds like a pretty functional market reaction to me.

http://blogs.telegraph.co.uk/finance/files/2010/01/goldman.jpg