Woodford is right about overcharging by fund managers

2014-10-13

Michael John Lytle (pictured), Chief Development Officer at ETF provider Source, comments on Neil Woodford's view that too many fund managers are over-charging clients…

It is important for investors to choose the right solution for the right problem. 

Active management can add value, but most investors only want to invest in the top quartile funds, leaving three quarters of the fund management industry as increasingly unattractive.

In most circumstances it is because the active fund manager has failed to consistently out perform their benchmark. Active managers charge for that alpha, so when you cannot find an active manager who can outperform, then an investor should buy a passive fund and save on the higher fees. 

It is important to be exposed to the right asset pools and catch the ones which are rising. 

Asset allocation should be the right focus before manager selection. By way of example if the big stocks in the US are up 17% in 12 months while equities in the Eurozone are up just 6%, the decision to own US equities is more important than which fund you bought. And often the best way to make that initial selection is by using ETFs and other passive alternatives.