A fourth problem is that supervision is always one step behind. In the Ablerex case, for example, media reports about the surging share price in 2010 caused the Financial Supervisory Commission to investigate the case, but it only issued disciplinary measures in June last year.
The commission said the reason for the delay was that the it had to cooperate with the prosecutors’ investigation, but the Taipei District Court only initiated an investigation into a possible breach of trust and other offenses in November last year, following a legislative interpellation session and media reports.
This gives us an idea of how financial supervision, investigators and the judiciary always are one step behind. When it takes investigators two or three years to take action, the alleged perpetrator is given ample time in which to destroy evidence, agree on a story with other involved parties and rid themselves of any assets obtained.
Although ING Securities Investment and Trust Co has stated that it is willing to compensate for the losses sustained by its manager in the Ablerex case, this is limited to the government fund. Retail investors will likely have to wait a long, long time before they see any compensation.
In a 2010 book, John Bogle, one of the founders of the mutual fund industry, wrote what could be a fund manager’s view of the financial crisis: “The bad news is that we lost a ton of money. The good news is that none of it was ours.”
History tells us that we will never be as careful in managing other people’s money as we are managing our own. If the management of government funds continues to be riddled with contradictions, insufficient transparency and ineffective supervision, leading to management irregularities, it would be better to start investing in index funds that track market performance, rather than paying huge management fees to external managers.
Even Berkshire Hathaway chairman and chief executive Warren Buffett believes that fund management fees are too high and often erode investor interests. On eight occasions, he has publicly recommended index funds, and he even entered into a bet with Protege Partners that the S&P 500 stock index will outperform a collection of hedge funds over a 10-year period if all fees are included.
If even Buffett says that stock market index funds are the best investment over the long term, why would the government think that it would be able to find managers for its funds that could beat the market?
Jason Yeh is an associate professor of finance at the Chinese University of Hong Kong.
Translated by Perry Svensson