Holly's Blog: Sticky Bandits
15 Oct, 2021
Figures released today from the biggest trading platform in the UK – Hargreaves Lansdown – told a tale of the continued march into DIY investing. This business now has a whopping £138 billion Big Ones on its books. And 1.7 million customers. Who put through 40,000 deals every single day.
What are you all doing, guys!? That’s a lot of (expensive) trading.
I was interested to read that their retention rate is 93%. Or for every 100 clients that starts the year with them, 93 will still be there at the end. As well as all the newbies.
Don’t be apathetically sticky
The industry has an awful adjective to describe this customer behaviour – “sticky.” Many providers love sticky clients because you can ignore them and charge them a lot and they still don’t go away. (I’m not referring to Hargreaves here, to be clear. They’re pricey but good).
The most obvious example of this are investors who bought directly from a fund manager about 10 years + ago. They will mostly pay above the odds, get a poor service and be the most profitable yet small channel for the company. So if you have a bit of paper somewhere, with a handful of units in a fund bought donkeys’ years ago – DON’T BE STICKY! Have a rummage and move somewhere better. I can almost unilaterally promise you that you will pay less and get a better service.
Platform clients are also largely sticky. This is because doing the admin to move a pension is so bone-crushingly tedious, we can normally find something better to do at the weekend. And also the process can break. Or take 4 months. I know someone who transferred an ISA from The Share Centre (as was) to AJ Bell in June this year and it took a few months and the money disappeared into a Black Hole for a while. To be fair, now he’s there, he’s very happy. But this is a common experience across the industry.
If you have been on the same platform for ages, maybe have a squizz at our cost calculator and see if you’re paying above the odds. If you are – is the service worth it? Our Best Buys tables might offer some inspiration.
I am a better driver than the average. No….I AM!
Here’s something else to question. The latest report from fund research house Morningstar shows that a significant number of low-cost passive funds available for sale in Europe did better than their more expensive active peers. Hmmm . . . The whole point of an active fund is that you pay someone to be jolly clever and to beat the average.
Over the 10 years to June 2021, the success rates of active funds were less than 25% in nearly two thirds of the categories analysed. Let’s put that in plain English.
Categories are just ways of grouping things together – maybe by country, or by type of thing. Medium-sized UK companies, for example. The research means that only about 1 out of every 5 active funds does better than a passive equivalent in a majority of categories. Or, 4 out of every 5 active funds are a waste of money.
Lots of people are quite cult-like about passive funds. Evangelical. But despite the numbers and probabilities, I still quite like my active funds. As one passive cult member once sighed, in a disparaging tone, “You can’t wean yourself off the methadone that is active management, Holly”
This feeling that our superior judgement will somehow mean that we pick the 1 in 5 good active funds is arguably arrogant. It’s like driving. Even though we can’t all be better drivers than the average, I am. I mean I really am. It’s not my fault they make the kerbs so high.
But when you hold a collection of funds in your portfolio which deliver the goods – I’m thinking about managers like Nick Train, (expensive) Terry Smith, some of the Baillie Gifford stable, and many more – it’s hard not to see why a combo meal of active and passive is not the best approach. This is typically called a core and satellite approach – where core is boring and low-cost and sensible – and satellite is the sexy stuff. It’s like wearing your tracksuit for 6 days a week and digging out the heels on a Saturday night.
Despite their turgid content, The City is actually full of colourful eccentrics. One such man (who I kid you not, used to march around carrying a bag full of shotguns, oblivious to why this might be a problem) once told me, “Where there are bandits, there is alpha.”
Alpha is a nobby way of saying outperformance. He meant that there is so much super-fast access to information now, that in big, developed, highly regulated markets, everyone knows everything immediately. You can’t get an advantage – so why bother trying to outperform. Whereas in emerging and smaller markets, where governance is a bit dodgier and full information harder to come by – well, that presents opportunities for those on the ground with really good insights. This opinion explains why many people use passive funds for exposure to very large, well-regulated markets – the US for example – and active for more niche sector plays, emerging markets and less well-researched opportunities.
We know that picking funds is a challenge for most – and next week we’ll reveal something new from us which we hope will help.
Over and out for this week. Have a lovely weekend everyone. Better go and panic buy your Christmas presents. FFS!!!