The self - empowered investor has a radical impact

Posted On Friday, 24 September 2004 02:00 Published by
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Throughout the 1990s, with global equity markets performing so strongly, it was easy to make money as a portfolio manager.

Investment psychology

September 23, 2004

By David Butler

Throughout the 1990s, with global equity markets performing so strongly, it was easy to make money as a portfolio manager.

No matter what your investment portfolio looked like, as long as it was relatively well diversified, you were pretty much guaranteed a reasonable return.

The investment management and pension fund industries prospered and as a result of the healthy returns generated from the equity markets, these same money managers charged significant fees, which they justified as being the cost of their "expert" advice. After all, look at the returns that were being achieved!

No one particularly called into question these fees as the net returns were generally still positive.

The fact that the vast majority of fund managers, after costs, significantly underperformed the benchmark indices simply went unnoticed.

However, since 2001 the picture has changed dramatically. Equity markets globally have languished, and the performances of these "experts" have come under significant scrutiny.

With equity markets producing negative returns, and fund managers still charging fees, people's pension funds have been decimated.

People are understandably unhappy to pay a fund manager 2 percent or 3 percent a year simply to match an index that itself is down 5 percent for the year. And why should they?

Why not just go out, pick a basket of stocks and put them in their own investment portfolio or pension fund to save this 2 percent "expert advice"

cost? After all, everyone remembers the old story of the monkey throwing darts at the stock list and picking a basket of shares that outperformed the expert's basket.

People have been forced to take things into their own hands, as the charges levied for expert management have hardly been good value.

This trend of "self empowerment" can be readily observed on a global level.

Just look at the success of index tracker products such as Diamonds and Spiders, which track the Dow Jones and Standard & Poor's indices respectively, as well as the success of the Satrix40 in South Africa.

These products are simply built around the idea of tracking an index and they return whatever the index returns at a minimal cost. In most cases this return is less than 0.25 percent.

They are designed for the "man on the street" and are readily accessible to the private investor. Since most money managers (after fees are extracted) vastly underperform the index, it seems logical for these products to enjoy tremendous success.

Self empowerment in investment decisions is not confined to equity markets.

A significant part of the property boom can be attributed to the private investor's experience with fund managers.

After seeing a large part of their asset base, obliterated over the past five years, investors are asking why they should invest in intangible financial products which lose them money.

With the same money, investors could have bought a second house or an apartment or anything else they could see, feel and touch. Property is a natural area of development for the self empowered investor, as it is something that everyone is comfortable with and understands.

How many people really understand how an inflation-linked government bond, or indeed how a company's share price, is really derived?

So a large part of the demand for property is coming from the investor base.

People buy a second house for their pensions, looking forward to a steady rental stream as income for their future years, plus the potential extra return of asset appreciation.

No longer are they subject to the whims of the markets or the vagaries of a pension fund manager's investment philosophy. And no longer are they subject to their exorbitant charges.

The performance of equity markets and fund managers over the past five years will have profound effects on the financial market. The shift to the self-empowered investor is having an enormous impact on people's asset bases and investment allocations.

To date, the winner has been the property market and the losers will be fund managers.

Do not expect this to change in the medium term; and do not underestimate the long-term effect a wholesale shift in investment psychology can have on a market sector. There is plenty of recent history to tell us this.

David Butler is the executive chairman of Global Trader

Publisher: Business Report
Source: Business Report

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