Fund Management: Enter Google

The fund industry is remarkably consistent for an industry that's supposedly based on meeting or out-performing a bench. There's a cockroach quality to the industry. The comparison isn’t meant to be derogatory to those working in funds, rather an analogy that best suits their staying power: even if there’s nothing left, there will still surely be funds and fund managers. 

With the exception of those fund managers who consistently outperform the market (and there aren’t many of those in fund management) the reason for this is baffling. However, there are some reasons which might have, if not justified their existence, at least convinced their clients that they were justified.

A good reason people buy any under-par product or service is marketing. Fund management is no different. Funds are given attractive-sounding names, often using words like “growth,” “alpha” and “trust.” It’s important to remember here that just because a fund has “growth” in its title, doesn’t make it grow. “Growth” in the name of a fund is the same as putting go-faster stripes on the side of a sports car. It looks good. It doesn’t do anything.

Fund managers are also famously fickle – if a fund isn’t doing well for whatever reason – there’s a good chance it will be shut down and a new fund will replace it. This is what’s known as “survivorship bias,” and means that only funds that perform well are allowed to continue. It’s a bit like being bad at half your subjects in school and only showing the rest of the subjects on your report card – who wouldn’t be impressed by the performance.

A third reason people hand their money over to fund manager is because it’s what they want to put their money in anything which will provide a better return than a traditional deposit account. This is a reasonable excuse and it’s a rare fund that will make less money than a bank deposit account over the long term. Making less on a consistent basis would be a skill all of its own, in fact.

And perhaps the final reason that people trust funds is the same reason that people take on mortgages several times too large based on their current salary: they’re not financially literate and when a financial advisor comes along saying that a fund should be a part of every long term family investment plan, it seems the obvious thing to do.

Enter a new player

There is one word, however, will is currently striking fear in the heart of every fund manager – arguably even more than “benchmark.” The word is Google. The internet search giant looks to be entering the realm of fund management this year or next, having commissioned a large scale research into the industry. Given the size of its cash pile, its reputation, its ability to hire the best talent and the data at its disposal, fund managers have good reason to be nervous.

This might even be the next step in Google’s strategy given that it has already entered venture capital, having invested in nearly 200 firms (including, most notably, the notorious Uber). Unknown to many, it also has invests in government bonds and has its own trading floor. Google is already in finance. It would seem given the huge inefficiencies in the fund management business, that it’s only a matter of time before they enter there, too.

It’s hard to see what’s to stop Google taking over a chunk of the industry. Does it see its future growth tailing off in search? Probably. There aren’t many public companies in the world with more data than Google (in fact, are there any?), so when they make a decision to invest in something, an industry has to sit up and take notice.

Some things never change

Well, the sensible thing to do would be to sit up and take notice. But a Financial Times article from earlier this week, quotes the head of a large UK fund house as saying, “Google would find the fund management market more difficult than it thinks. There are significant barriers to entry and it’s not something you could get into overnight.”

And he wasn’t alone. In fact, several current players in the fund management industry mentioned various factors about why Google wouldn’t find it so easy. Reasons cited included regulatory oversight, industry barriers (just like the industry barriers Google faced in the search industry against Yahoo!) and investor demand.

This all sounds like the fund management is in denial, until you consider that at the outset of the article, two of the bigger players in the fund management industry, Schroders and another unnamed fund house, told the article that they were concerned with one going as far to say that Google’s entry was his “biggest fear.”

The lesson here is perhaps that smaller fund houses will be hit most by Google’s entry if it does happen. Likewise, they’re most often the ones where marketing and spin is what sells their funds more than anything else. The fact that they’re claiming not to be afraid about a Google entry to the market could be just more of the same. A bit like the way the Information Minster in Iraq constantly claimed Iraq were winning the war.

Fund management Industry: RIP?

It’s a little too early to call the end of the fund management industry. For one thing, many of the fund houses in the industry have created disincentives (otherwise known as “exit costs”) for anyone who wants to divest from their funds. Likewise, Google still haven’t confirmed they’re entering the market and when even if they do, they haven’t revealed their fund structure, how much it will cost to enter and indeed, who can enter the fund.

If Google do enter the market, however, and we believe that they will, the advice to all fund managers would be to update your profile on linkedIn to beat the rush. With all due respect to the brightest of fund managers out there (who are brighter than most of us), this is a company who knows about information before you ever possibly can.

Google Trends is just what they’re showing us about the information they continue to collate. The tip of the iceberg. Even if a nice guy from a respected fund management firm gave a good sales pitch and showed good results on a fund which had lasted a while, you’d have to ask him, “what can you tell me about x, y and z that Google can’t?” And there is not a fund manager out there that can reasonably answer that question.