The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain’s orders. The captain is the consumer. Neither the entrepreneurs nor de farmers nor the capitalists determine what has to be produced. The consumers do that. – Ludwig Von Mises.
Nobody in their right mind would pay a financial entity to manage their wealth if they knew they are going to be charged annual fees close to 2% for a service which can be received by paying commissions lower than 0.5%.This practice still occur because many savers, asset management firms clients, are still not aware of it.
There is a big problem of information asymmetry: large entities know that most of their clients do not have financial literacy so they can offer mutual funds with low added value and high commissions. They underestimate the learning capacity of Spanish people, since the basic concepts are very easy to comprehend. At Vadevalor, we will work so that savers are better informed and big entities are forced to to meet their clients demands, either by offering funds which do try to outperform their benchmarks or by lowering their commissions to levels which are similar to those charged by the most efficient entities specialised in passive investing.
Why is the period of changes in the asset management sector so necessary?
There is a big problem in the sector, which is the great difference of information between financial entities which issue investment vehicles and savers. Most money does not reach those professionals who have achieve the best long term results and intend to add value, but those entities with the strongest distribution channels and benefit from the lack of financial education of a big share of the population. Due to this, most Spanish families have not obtained good results from their investments.
According to a research paper called “Active Fund Management: International Evidence”, 42% of all equity funds in Spain are sold as active funds but in reality replicate benchmark returns, for which they are charging commissions close to 2% although they should be charging minimal commissions as they are not truly active.
According to the ranking of commercialization in Spain of Collective Investment Institutions and pension funds by financial groups published by Inverco (June 2018), Caixabank, BBVA, Santander, Bankia and Sabadell have a market share of 40.8% (€241,132M marketed by these five entities on a total amount marketed in Spain of €590,797M). With regard to pension plans, these five entities have a 62.1% share (€68.575M on €110,372M).
As we will see below, these entities have not obtained good long-term results for their clients. We can differentiate between three types of investment funds
The passive investment funds, which adjust the percentages they buy from each company automatically to replicate the benchmark index, assigning a percentage to each share based on their capitalization with respect to the total market capitalization. For example, a passive IBEX 35 fund would have 15% of Santander, 10% of Inditex, 8.5% of Iberdrola, 7.62% of BBVA etc. They do not require analytical efforts so these funds have very low costs.
Truly active investment funds, which seek to obtain returns higher than those of the benchmarks, analysing companies in depth and investing only in those securities that fund managers consider undervalued.
Funds that are sold as active investment funds, charging high commissions, but that in truth replicate the benchmark. They are like the funds in point 1 but charging annual fees as if they were type 2. This is the part of the market that should disappear.
Long-term results of the 5 largest entities in the sector, from June 2008 to June 2018.
Equities Spain, 11 funds that have 10 years of track-record
Two funds have achieved results very similar to the main Spanish benchmark and nine performed worst.
If they are charging fees as high as the ones of active funds it is because they should be trying to perform better than their benchmark.
Average annual return: 1,1% vs 3% IGBMT (Índice General de la Bolsa de Madrid with dividends)
€10,000 growing at a 1% rate over 10 years become €11,046 and at a 3% rate €13.439
*Caixabank bolsa all caps, Caixabank bolsa gestión España, Caixabank bolsa España 150, BBVA Bolsa Plus, BBVA Bolsa, Santander acciones españolas, Bankia Bolsa Española, Bankia Dividendo España, Bankia Banca Privada RV España, Sabadell España Dividendo, Sabadell España Bolsa
European Equities, 12 funds with 10 years of track-record
Not even one outperformed its benchmark. The fund with the highest return achieved an annual return of 3.7%.
Average annual return: 2.3% vs 5.5% achieved by the MSCI Europe index with dividends.
€10,000 growing at a 5.5% annual rate over 10 years become €17,081, whilst growing at an annual rate of 2.3% they become €12,553
* Caixank bolsa gestión Europa, Caixabank bolsa selección Europa, Caixabank bolsa dividendo Europa, BBVA bolsa Europa, BBVA bolsa dividendo, Santander solida div. Europa, Santander acciones Euro, Bankia dividendo Europa, Bankia euro top ideas, Sabadell Europa Bolsa base, Sabadell Europa valor base, Sabadell Euroacción base
The last years have been extremely good for fixed income securities. We have taken some of the most important indexes in the sector, such as Bloomberg and Barclays. The bond benchmark Bloomberg Barclays Euro Total Return Value Unhedged, LBEATREAU (more than 4,000 securities, with more weight in government bonds) increased by 4.8% in 10 years. The Bloomberg Barclays Euro Aggregate Corporate Total Return Index Value Unhegdged (more than 1,900 securities) increased at an annual rate of 4,8% over 10 years.
The benchmark of corporative bonds Bloomberg Barclays Euro Aggregate Corporate Total Return Index Value Unhedged EU (more than 1,900 securities) increased in value by 4,8% per year over 10 years. The global bond benchmark (hedged in €) Bloomberg Barclays Global Aggregate Total Return Index Value Hedged, LEGATREH, increased in value by 3.7% per year over 10 years.
We see how all the main benchmarks of fixed-income securities have increased in value by at least 3.7%, and as we saw, the MSCI Europe with dividends, the main European benchmark for equities increased at an annual rate of 5,5% and the MSCI World with dividends at an annual rate of 9,5%. Therefore, the results of the benchmark for balanced fonds (50% equities) would be between 5% for funds focused on Europe and 6,5% for global funds. However, average returns of the 11 balanced funds* of those 5 entities with a track-record of 10 years equalled 2.1%.
Why were returns so low? Because of high fees and the composition of their portfolios. Not only we see that their portfolios have an extremely large number of shares and bonds, but there are also a lot of funds in their portfolios, most of them passive funds. In addition, in their portfolios they include those funds which pay them the highest commissions and not the best ones.
* Caixabank crecimiento, microbank fondo ético, BBVA Gestión decidida, BBVA Gestión moderada, Santander Tandem 20-60, Santander PB Cartera Moderada, Bankia mx rv 75-universal, Bankia mx rv 50-universal, Bankia Fonduxo cl univers., Bankia soy así flexible, Sabadell Renta Variable mixta España
We have seen that the returns of the main benchmarks of fixed income-securities over the last 10 years have been close to 5% per year. However, the average returns of funds of these 5 big institutions with more than 10 years of track-record has been 1,9%.
The importance of compound interest should never be forgotten: €10,000 growing at an annual rate of 2% over 20 years become €14,859, at a 5% per year become €26,532, at a rate of 10% per year would become €67,274 and at a rate of 15% per year would become €163,665.