An obsession with peer risk and swollen investment teams in the funds management industry means end investors are getting expensive and mediocre performance from closet tracker funds, according to veteran chief investment officer of PM Capital, Paul Moore.
At a lunch briefing in Sydney, the fund manager who also founded the $2.2 billion global equity boutique, took aim at fund managers who failed to take meaningful positions away from the benchmark.
"Most of the investment world runs on process," Moore said. "If a firm doesn't like a particular stock that makes up 10% of the index then they will only hold 8% because internal processes say that is the biggest underweight they can take."
Moore said the fact that governments are able to sell bonds at negative interest to large institutions showed that professional investors had lost sight of fundamentals.
"Most investment is not done on a rational basis. Everyone is protecting against business risk. They don't want to take a bet away from the index because they don't want to get it wrong and get the sack.
"Gatekeepers can't tolerate short-term variances but if you've got a great investment it's naturally going to be at odds with the market."
Moore, who has just notched up 30 years in the funds management industry, said advisers and clients need only ask fund managers two questions to determine if they are a closet tracker: How many stocks are in the portfolio and what is your top 10? Closet trackers, he said, will have high numbers of stocks and top 10s that have a lot of commonality with the biggest stocks in the index.
"The only alternative to indexing is genuine investing," Moore continued. "Private equity, alternatives, concentrated portfolios...the guys in the middle are going to get creamed."
The global equity specialist then turned his attention to investment teams, which he said had become inefficiently large in most firms.
"Ninety per cent of the funds management industry is redundant because why do you need a team of analysts to track an index? It's because it's the first thing external people ask. Big asset managers pay these guys a fortune and they don't do anything," he said.
"At any one time there're only a few areas of the market that are mis-priced. All the analysts covering the other sectors are just spinning their wheels filing stuff.
"Every time you add a new person it makes stock picking harder because it adds to the noise and information gets diffused."
It is often said by equity managers with a mandate to scour the entire globe for investment ideas that getting the geographic allocation right in any given year is the most important driver of returns.
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