TheEconomistNovember 14th 2020 3I
n march 1868 a prospectusappearedfora newkindofmoney-
market scheme. The Foreign & ColonialGovernment Trust
wouldinvest£1m($5matthetime)ina selectionofbonds.For£85
aninvestorcouldbuyoneof11,765certificatesgivinganequal
share.Thetrustpromiseda 7%yield.Itsaimwastogive“theinves-
torofmoderatemeansthesameadvantagesasthelargecapitalist
indiminishingtheriskofinvesting...byspreadingtheinvestment
overa numberofdifferentstocks.”Themodernasset-manage-
mentindustrywasborn.
AweeklaterTheEconomistrana leadingarticlebroadlywel-
comingthenewtrust.But—settingthetonefor 150 yearsoffinan-
cialpunditry—itquibbledabouttheselectedbonds.Achunkwas
allocatedtoTurkeyandEgypt,countriesthat“willgoonborrow-
ingaslongastheycan,andwhentheyceasetoborrow,theywill
alsoceasetopayinterest.”FearswereexpressedthatEuropewas
disintegrating.“InlendingtoItaly,youlendtoaninchoatestate;
andinlendingtoAustria,youlendtoa ‘dishevelled’state;inboth
thereisdanger.”
ThetrustwasthebrainchildofPhilipRose,a lawyerandfinan-
cialadvisertoBenjaminDisraeli.Hisideaofa pooledinvestment
fundforthemiddleclasscaughton.In 1873 RobertFleming,a Dun-
dee-basedbusinessman,startedhisowninvestmenttrust,the
FirstScottish,modelledonRose’sfundbutwitha bolderremit.It
waslargelyinvestedinmortgagebondsofrailroadslistedinNew
York.The holdingswereindollars,notsterling.Andwhereas
Rose’strustwasa buy-and-holdvehicle,thetrusteesoftheFirst
Scottishreservedtherighttoaddordropsecuritiesastheysawfit.
Rose’strustsurvivestothisday,butassetmanagementisnowa
farbiggerbusiness.Over$100trn-worthofassetsisheldinpooled
investmentsmanagedbyprofessionalswhochargefees.Thein-
dustryiscentraltocapitalism.Assetmanagerssupportjobsand
growthbydirectingcapitaltobusinessestheyjudgetohavethe
bestprospects.Thereturnshelpordinarysaverstoreachtheirfi-
nancialgoals—retirement,educationandsoon.Soassetmanage-
mentalsohasa crucialsocialrole,actingasguardianofsavings
andstewardoffirmsthosesavingsareentrustedto.
It isa businessunlikeanyother.Managerschargea fixedfeeon
theassetstheymanage,butcustomersultimatelybearthefull
costsofinvestmentsthatsour.Profitmarginsinassetmanage-
mentarehighbythestandardsofotherindustries.Forallthetalk
ofpressureonfees,typicaloperatingmarginsarewellover30%.
Yetdespiterecentconsolidation,assetmanagementisa fragment-
edindustry,withnoobviousexploitationofmarketpowerbya few
largefirmsandplentyofnewentrants.
Inmanyindustriesfirmsavoidpricecompetitionbyofferinga
productdistinctfromtheirrivals—or,atleast,thatappearsdis-
tinctive.Breakfastcerealismostlygrainandsugar,butmakersof-
fera proliferationofbrandedcereals,withsubtlevariationsona
theme.Assetmanagementisnotsodifferent.Firmscompetein
marketing,indreamingupnewproductsand,aboveall,ontheir
skillinselectingsecuritiesthatwillriseinvalue.
Theindustryhasnotperformedwell.Eversincea landmarkpa-
perbyMichaelJensenin1968,countlessstudieshaveshownthat
managersofequitymutualfundshavefailedtobeatthemarketin-
dex.Arithmeticisagainstthem.It isasimpossibleforallinvestors
tohaveanabove-averagereturnasforeveryonetobeofabove-Themoney doctors
Special report
The asset-management industry is at last sorting the quacks
from the true specialists, argues John O’SullivanAsset management
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