Often a private investor decides to go down the self-select investment route in the belief that they will perform better than a fund manager with an established track record.
The arguments for self-select stocks and shares ISAs are simple. A private investor who feel confident enough about investing can chose from a variety of stocks and shares to build their own portfolio over time.
But can the private investor really do better than a fund manager who is paid every day to watch and accurately predict the markets?
Can you do better?
Certainly you – the private investor – have far more freedom of choice over your investment portfolio than a professional fund manager. In fact, the most obvious thing the private investor can do is to change his or her investment strategy at the click of a mouse, instantly.
Instead, a fund manager has a pre-determined laid-out strategy which is how he gets people to invest in his fund. If he feels constrained he has to notify shareholders or, at the extreme, call a shareholders meeting to change his investment strategy.
In comparison, within the allowed investments in a self-select ISA, the private investor can do what he likes whenever he likes. Yesterday you were in cash, today you have bought some Tesco shares, and, tomorrow you are buying a gold ETF, etc. A private investor has no constraints whatsoever.
With a self-select ISA the private investor is in complete control of his/hers money. Self-select ISA wrappers are free with the majority of brokers, with only dealing charges being the main expense.
Can fund managers do better?
With some kind of a benchmark to conform to, such as doing 5% better than the FTSE100 index or something similar, it is astonishing that approximately 95% of fund managers underperform their chosen benchmark. A further hurdle comes in the form of fund management charges.
Although fund managers do work hard, researching markets and companies on a daily basis, the fact that they can charge up to 2.5% total expense ratio means, in order to meet their benchmarks, that they also have to perform more than 2.5% better – a challenging task even if one takes all the right investment decisions.
Another advantage the private investor has is to stay in cash during volatile markets. Most professional fund managers have not that choice, they are not allowed to be in cash, and instead they have to remain invested all the time.
Self-select ISA investors can stay in cash for periods at a time, if they wish, waiting for companies to become undervalued before commencing a buying spree.
Is it hard work?
While being your own fund manager within a self-select ISA gives you all this freedom it is still essential, as it is with any share portfolio, to have an investment strategy.
Using simple financial ‘instruments’, such as stop losses and trailing stop losses, a private investor can run a disciplined portfolio without having to keep a constant watch.
Tools such as stop losses and share monitoring alerts take some of the work out of running your own ISA portfolio and in fact the wrapper allows the investor to do as much or as little as he wants with it.
Whether it is hard work or not also depends on what you want to do. If you want to engage in active trading on an hourly or daily basis it is going to take a lot of monitoring. If you want to put in place a buy-and-hold strategy and look at that on a monthly or quarterly basis it will involve a bit of initial work.
Even if you are engaged in a long-term wealth building strategy using your self-select ISA you will still have to do more work than handing your money over to a fund manager, but there is no reason that you shouldn’t be doing well, provided you do your homework.
Better investment tools?
You might presume, being the professionals, that fund managers are able to have access to better investment tools, monitoring and information than the average private investor. However, nowadays there is all sort of useful investing information available on stocks and shares through websites, magazines and books.
However, access to fancy investment tools does not automatically mean outperformance. It is true, fund managers have good tools and watch all the time, but the trick is, when selecting a fund manager, to chose the one who will get it right . . . at least most of the time.
There are hundreds of ‘active’ funds in the UK All Companies sector and unfortunately a lot are doing only slightly better or perhaps slightly worse than the market. Also, there are only relatively few fund managers which have a unique investment style.
What are we going to do?
In order to unearth some of the wisdom from fund managers with distinctive investment styles and a successful track record, we intend to interview several of them in the next few months.