Episode 420 - On this week's episode I discuss whether it is worth following a fund manager when they leave one investment fund house for another. I also explain the new changes in student loan repayment rules that could mean that students will be repaying their loans for almost their entire working lives, acting as an additional 9% tax on income. Finally, we discuss why the Bank of England raised the base rate so aggressively and what it means for where the base rate will be in the future.
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Abridged transcript of Episode 420
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Should you follow fund managers
Below are some of the bullet point highlights from this section of the podcast
- Morningstar conducted research on fund managers who moved from one fund house to another.
- The research focused on fund managers' performance before and after the move, using a measure called Jensen's alpha.
- In the initial 3 years after the move, fund managers typically experienced significant increases in average alpha, showing better performance.
- This phenomenon can be compared to the "new manager bounce" often seen in football.
- However, if the manager had a poor track record before the move, their performance did not necessarily improve.
- Even those managers who did not perform better in the new fund still outperformed their old funds' managers, on average.
- After 5 years, the performance seemed to even out, and managers started to underperform compared to their former employer.
- Our own in-house 80-20 Investor research suggests that fund managers may take more risks early in their careers to outperform, but become more cautious later on.
- Fund managers also tend to have a herding mentality and avoid straying too far from the benchmark or their peers to avoid losing their job.
- Our in-house research concluded that following a star manager may not guarantee outperformance in the long term.
- The research also showed that luck also plays a role in fund manager performance, and low charges are linked to better long-term performance.
- Investors should evaluate funds based on their own merits, including charges and investment strategy, rather than blindly following a manager.
- Regular portfolio reviews are recommended to take advantage of managers/funds performing well in the current environment.
New student loan changes
In this part of the podcast I discuss the new changes to student loans which are summarised in the articles in the 'Resources' section below.
Base rate dilemma
In this section of the podcast I discuss the dilemma facing the Bank of England when it comes to monetary policy and inflation. I also discuss the outlook for interest rates and mortgage rates and whether the government is likely to offer financial support for mortgage borrowers. Here are some of the highlights:
- The Bank of England surprised the market by raising its base rate from 4.5% to 5% (the market expected it to raise the base rate from 4.5% to 4.75%).
- Inflation has proven to be stickier than anticipated (having not fallen for two months) which led to the Bank of England's aggressive rate hike.
- Market expectations for the terminal rate (which is peak level the base rate will hit) have been steadily increasing and the base rate is expected to hit 6% by late 2023 or early 2024.
- Consequently, mortgage rates have risen significantly, with even the best fixed rates increasing by nearly 1% in the past month.
- However, the impact of rate hikes is limited to a smaller portion of households than in the past as the majority of households remain on fixed-rate mortgages that start prior to the current wave of base rate hikes.
- Therefore, raising interest rates may not fully address the imported inflation and supply-side issues caused by the pandemic and Brexit.
- Brexit, loose monetary policies like quantitative easing (QE), the furlough scheme, the energy price guarantee and supply and demand dynamics have contributed to the UK's inflation struggle.
- It means that the economic landscape and mortgage backdrop in the UK are therefore unfavourable, which could potentially lead to higher rates for a longer.
- Government intervention in mortgage relief is unlikely as it would have limited efficacy and would interfere with the Bank of England's monetary policy measure.
- Future rate hikes are likely but depend on inflation data and economic indicators.
Links referred to in the podcast:
- Morningstar fund manager research data
- Student loan repayments set to change: What you need to know
- Student debt: What you need to know about repaying your student loans
- Mortgage lenders agree to switching flexibility & 12-month repossession grace period
- Bank of England base rate increases by 0.50% to 5.00% - What does it mean for you?