Moral Hazard – A Problem for The Active Fund Manager?

“Drumm was trying to save the bank, court hears”

You have probably read or heard some details of the recent trial of David Drumm, the former CEO of Anglo Irish Bank. The headline above caught my attention for one reason – I believe that it is true. I think David Drumm was trying everything he could to save the Bank. Whether he crossed the line in terms of moral hazards and ethical standards is for others to decide.

I think there are lessons for investors to learn here. Active fund managers often boast that they are better stock pickers than the competition. What this means is that some Active Fund Managers believe that they have a better record of picking the best companies’ shares for their investment portfolios.

One of the problems I see with this is Moral Hazard. It is all well and good having dozens of analysts looking at the numbers for a particular company. The most senior fund manager might then meet with the Senior Executives of a particular company. Moral Hazard means that sometimes, the figures will not tell the whole story. Moral Hazard means that sometimes, senior executives will not tell the whole story.

I think the Anglo Irish Bank story demonstrates this perfectly. The rhetoric that came from the Bank (and the actions taken by the Bank) were all designed to give the “marketplace” comfort that the Bank was in a reasonable place to cope with the financial crisis. We now know that this was in fact not the case and ultimately the Bank would collapse and shareholders would lose everything.

If you buy the whole market available to you (a passive approach), you cannot rule out Moral Hazard. You can however dampen the effect if may have on your particular portfolio. If you have read any of my previous Blogs, you will know that I believe Active Fund Managers cannot beat the market consistently over a long period of time. It is therefore my belief, and a core belief of the team here at Metis Ireland, that an Evidenced Based Approach to investing will yield the best results for our clients.

Carl Widger
Co-Founder & Director of Metis Ireland

Disclaimer

Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.

All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified independent financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.