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A Zero Sum Game

Peter Hargreaves, co-founder of Hargreaves Lansdown, is quoted in this week’s Financial Adviser as saying that the vast majority of investment funds are “managed by complete morons”. While I would never comment on specific competitors, I have sympathy with Hargreaves’ view.

My industry is one that I both love and abhor in equal measure. I love it because there is nothing more pleasurable than analysing investments and performing well for one’s customers. I hate it because there is a general lack of trust of the industry among the public.

This lack of trust is due to a number of reasons, but arguably they all relate in some way to the fact that morons are prevalent and able to stay in business far longer than would be the case in other industries. Take medical practice, for example. If a doctor consistently underperforms, he gets struck off by the British Medical Association. Not so in my industry, in which poor fund managers always seem to be able to find a home.

But my industry is not like other industries. In my industry, it is possible to buy index funds. In no other industry can you buy the “average”, and at low cost. What the existence of index funds means is that the morons are easily identifiable (they’re the ones who consistently underperform index funds), so they should be easy to get rid of, right? Wrong. There will always be morons.

The reason for this is that unlike other industries which progress, technologically for example, investing will always be a zero sum game. The “game” of investing is no different to 100 years ago. While in theory it would be possible for every fund to outperform the index, the reality is that if you outperform, someone else underperforms – that around two thirds of actively managed funds underperform is evidence of this.

As long as investing remains a zero sum game, morons are here to stay.

Important information

The views expressed are those of Peter Elston at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca Investment Managers and do not constitute investment advice. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.

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