Beware of stock market funds

About twenty years ago, investment funds began to establish themselves as a solution for the diversification of risks and opportunities in an increasingly globalized financial world. Thus, the small saver could participate in the purchase of Asian stocks, or in sophisticated thematic positions etc. From the beginning, banks have seen in this model of managing other people’s money a great opportunity to generate income. The EU has issued the MiFID (Markets Financial Instruments Directive) regulations on this subject, which put the banks in a bit of a four-way street, making them less able to react quickly to market changes. The investment fund can be compared to the inertia of a big boat: when the market falls, the fund cannot simply stop, sell everything and take refuge in the cash.

This could be seen in the crisis of 2008, when almost all funds have fallen by up to 50%, and then gradually recovered to their previous level. Those who have held on to their investment certificates have had at least a few bad moments. In recent years, a number of studies agree that the performance of investment funds is below the benchmark market by 80%: that is, out of ten funds, only two are better than the market in which they are invested. If, for example, a fund of German shares is involved, the benchmark market would be the DAX index, or the IBEX in the case of Spanish shares. Why is this, since the funds are composed and recomposed by people who are highly specialized in the field?

The answer is simple: it is due to what the bank or banks charge for their placement and distribution and at the cost of its active management. In this respect, a distinction must be made between, on the one hand, the and on the other hand, the funds of banks third parties, which are also offered to the savings client. Years ago, the cost of the fund was 3% per year and more, regardless of whether won or lost. We’re going to break this down, just as manifests today:   When the bank offers a third-party fund, it does so because with this earns a juicy retrocession at the bank’s expense emitting from the background. For years, in Switzerland, this money was he kept the placement bank of the other’s fund. But the court Federal, has ultimately declared that this retrocession belongs to the client, so many Swiss banks no longer lend themselves to this practice. Specifically, it was 1-2%, which in a million-euro placement meant up to twenty thousand Euros.

The amazing thing about the case is that the bankers, who theoretically had to be identified with the interests of the client, with the intention of always offering them the best, had to meet minimum sales standards of funds, required by their banks, so that the quality of counseling was involved in a conflict of interest that was hurting the client. It would be interesting to find out where follow these practices, in which countries or in which banks. Logically, all funds authorized under the rules of the EU are formally flawless, but there are still notable differences that the client does not have to elucidate if he lacks the necessary initiation into the subject or if it does not read with sum attention to the fund prospectus. The most comfortable thing for the bank is to rely on a administrative agreement signed by the client, because it allows him to choose the funds without prior consultation. When the market situation is bullish everything is smiles, but when the downside comes it is the moment when the disadvantages of the fund manifest themselves in a certain cruelty.

It is well known that banks never participate in the risk of the client.   As a reasonable response to this situation, the leading banks have implemented their own research and analysis of the markets, to which customers may have electronic access by means of a password. So, you can see why certain stocks, funds, themes, fixed income etc. are recommended. In particular, in Switzerland and other European countries the banks of the first magnitude thus offer a service to the client unprecedented.   A global market response to the high costs of traditional funds have been the emergence of ETFs, which in most of cases passively reflect the market itself through their rates, at a cost ranging from 0.2 to 0.4% per year. To date this sector has already reached the level of 2 trillion Euros, with a tendency Upward.