Proponents of pooled funds argue that there is a great uncertainty on the stock market, and that it is dangerous for the private investor to play there, as they get prone to high losses and costs. Although there is a grain of truth in this, the argument for holding an investment in a unit trust or investment trust is just as good as that for holding equities. In the long term, returns from holding equities have outstripped returns from safer investments such as corporate bonds, gilts and deposits. In spite of these gains, the fact still remains that professional investors have some advantages over private investors. The advantages enjoyed by professionals span three main areas, namely: (i) information gap (ii) economies of scale and (iii) expertise, and these shall be considered in turn.
Professional investors, fund managers to be specific, have become increasingly powerful as the strength of institutional investors have grown over recent years. In the course of using their powers to instil goal congruence in corporate governance, professionals have had more access to insider information from companies than the private investor. Directors are quick to part with such information, if a denial will cost them their prestigious jobs. It is claimed that when the private investor buys a share in a company, he has bought ownership, implying access to information to help him to vote sensibly when making corporate decisions, but this is not what happens on the field. This disparity in information makes the private investor toil to no avail to identify a winner, as any benefits inherent in such shares must have already being factored into the price by the time they are discovered.
Private investors have to make do with usually adulterated media information on investment, whereas the professionals have sophisticated analytical machines and tools, readily at their disposal, on the back of the strength of their pooled funds. As if this is not enough, there is as well the expertise they can flaunt.
Professional investors also gain enormous advantages by exercising economies of scale. This occurs in various aspects of their operations, including R&D (research and development), administration and transaction costs. The availability of greater financial resources to the professionals enables them to employ the services of experts to research into detail the companies, products, and services they want to invest in. A lot of cost is saved, since one expert can consider several companies, products and services on the same project. This is a benefit the private investor cannot dream of. There are impressive cost savings when it comes to paying fees and commissions on transactions, since a lot of the securities will be considered in bulk.
In spite of the above-mentioned advantages, one area in which the private investor beats the professional is flexibility . The private investor only have to invest in a stock that will provide the desired return and does not have to invest just to keep up with the market, like the professional. Fund managers also have to operate within the confines of the styles prescribed by their trusts, whereas the private investor can employ a free style in investment. Indeed, to his own detriment, he can sell all the shares in his portfolio, go and bask in the warm sunshine of Spain, and come back to invest whenever he wants; such flexibility is totally out of the reach of the professional. As an aside, with the application of due care and technique it is possible to select a share that will provide long-term returns, but there is no method for choosing a good fund manager.
It is true that there are fluctuations in the stock market and can lead to losses for the private investor. Equally, there are a lot of fund managers who make losses and fail to achieve their targeted returns. Either side of the coin has its own ups and downs, private investor or professional investor. It is perhaps wise to combine the two in a portfolio, to even out the negatives with the positives.
David Opoku BA Hons. Accounting and Finance. (Currently specialising in Financial Advising in a leading Financial Services company).
E-mail: davido312@aol.com Web: www.investmentyouneed.com
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