Taking meaningful investment choices off the shelf



I’m  pleased to hear that NEST is planning to explain its investment plans that everyone can understand.I visited their offices last week and spoke with their chief investment officer about this. I hope that as part of this explanation , he’ll show how he keeps the portfolio management costs of the fund down (see previous blogs).

But the flip side of keeping costs down, is creating value (see the debate on austerity v growth in the wider economy).

When we come to make decisions on how our money or our employee’s or member’s money is invested for the future, the old maxim of putting the right money in the hands of the right person at the right time applies.

The key focus has is about delivery and every decision made by Mark Fawcett, NEST’s CIO, needs to have in mind the outcomes for the individuals who are carrying the risk of his decisions going wrong.

I think this is partly what Mark means when he says that he takes a “risk based” approach to investment. But “risk based” is a phrase that I hope applies to all managers ;- this is not enough to explain to people what NEST is really about.

NEST is committed to taking bets on what will happen in the future, this is called active management. NES‘T’s current bet is that Government Bonds are over-priced. It does not have to own such bonds (unlike many pension schemes and it is selling them like crazy).

This is unfortunate for other pension funds but hey, that’s not NEST’s problem. This opportunistic approach is a perfectly acceptable way of going about things. NEST can explain itself as being risk-based because it has the clout and expertise to take the right risks and avoid the risks nobody wants. By clout I mean the researchers and the money to seed the huge number of investment strategies needed to make this “diversified” approach work. (For NEST read NOW who operate on similar lines).

At the other extreme is the TOBAM approach which is purely passive, it adopts a message in a bottle approach assuming that market tides will get you to where you want to be without intervention. The difference is not intent – but style!

A third style , which is effective but totally different has been pioneered by Terry Smith. Terry  has built his “Fundsmith” investment fund to over £1bn by following simple rules he has given himself. He has such faith in himself that he didn’t sell a single stock last year. Not only does he have the lowest cost of any UK  equity active manager, he has the highest growth!

What is common about all three styles of management is that they are carried out with conviction and can be understood by fools such as I.

People like me have the job of explaining the different approaches to people deciding how to invest their or their employees or their members money and the idea is that once we’ve got the conversation about costs out of the way, we can get on to deciding which way of managing money we want to adopt.

I take these three styles of money management as examples of how money can be invested over the long-term. Most pension money is invested over the long-term, (it’s a shame we cannot see more proper investment beyond the point where people start drawing their pension but put that beef to one side!).

In the short-term, (the period leading up to the point where you convert your money into a lifetime income – which is what a pension is) different objectives apply. Growing the pot is still important but so is insuring that it doesn’t decrease in its buying power.

The risks leading up to retirement are different and how investment managers adapt the way they manage their money to keep focussed on putting the right money in your hands, also varies. Words such as “lifestyle” and phrases such as “target-dated” are labels that describe the process managers use to guide your pot into the port so you can land your pension safely.

Which brings me finally , to the insight I had yesterday about how we can make things better for those buying a pension plan for use for auto-enrolment.

We just have to help people understand what is on the shelf.

Until recently I didn’t talk much about what was on the shelf because there was only one product, one style of management , one pre-retirement strategy.

But, and this is great, there are now real choices out there – by “real” I mean “a variety of good”. You can still buy into the old “any colour as long as its grey” lifestyle funds but you can also invest using the Danish Sovereign Fund – ATP (known here as NOW). You can buy into  NEST’s approach or you can use the tactical passive approach of L& G’s MSF or Alliance Bernstein‘s TDFs.

Don’t get scared by all those letters – they’re just short-hand for “real choice”.

And here is the best thing of all. I , an investment ignoramus, can understand the different styles and pre-retirment approaches of all these funds.

That means, that given some help from their marketing  teams , I should be able to tell my clients about the different choices they have in words that my clients can understand.

But I’m never going to have more than a hundred clients and there are 1.3 million purchasers in Britain.

So the next big challenge (once we’ve got this “charges thing” sorted out) will be to build a great big shelf on the internet which will allow all these investments to be properly displayed so people can pinch them, stroke them, kick their tyres and make a meaningful choice. Organisations like NEST who are publishing stuff that helps people do this for themselves are doing the general public a service.

I’m looking forward to doing that and I hope that many of you still reading , will be relishing the challenge of either helping your clients, or your employees, or your members or even yourselves to make the right choices too.

Office of Fair Trading, are you still reading?

To finish, here’s Banksy’s take on Lance Armstrong. Fake winners always have something to hide.

Lance armstrong





About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in auto-enrolment, club pension, dc pensions, de-risking, London, NEST, pensions, Popcorn Pensions, Retirement and tagged , , , , , , , . Bookmark the permalink.

10 Responses to Taking meaningful investment choices off the shelf

  1. George Kirrin says:

    When “risk based” usually means “volatility relative” with or without all that “risk budgeting” pseudoscience, I fear the worse (but not necessarily the worst). I prefer margin-of-safety investing, but you seldom hear of that these days. I wonder why?

    yours aye, George

    • henry tapper says:

      Margin of safety investing! Never heard it – George you are an education! I didn’t want to criticise NEST for their chicanery with younger investors but do feel that this idea that kids can’t cope with volatility and will jack in savings if not invested in “risk-free assets”is cod.

      They showed me the impact of their early day strategy and it’s minimal as it only lasts a couple of years during which time people don’t have much invested. Nevertheless, it is a case of craven political pandering and the misuse of behaviouralist mumbo jumbo.

      That apart, it’s hard not to like what NEST is up to

      • George Kirrin says:

        At the risk of being labelled a value investor, which I’m not, I offer a wee word of advice from the late Ben Graham:

        “[To] have a true investment, there must be a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.”

        So I prefer investments which pay interest or rents or dividends. But only so long as a wee portfolio mix of them can be bought at canny prices. Prices which yer man Graham (who tends to be labelled an equity investor) could have agreed offer a true margin of safety, whether equities or bonds or bricks and mortar, whatever. But don’t label me an income investor either.

        As for your so-called risk-free assets, if you mean government bonds or cash funds yielding close to zero, they don’t get on my canny buy list very often.

        I don’t expect highfalutin’ agencies like NEST to get this. There’s too much perceived career risk for them. Hard not to like, you say? Mmm, while some of the NEST people may be lowerfalutin’ (if there’s such a word; I’m sure there isn’t), it’s easy peasy for yours truly.

        yours aye, George

  2. Pingback: NEST Insight; what the 11m+ “unpensioned” think. | The Vision of the Pension Plowman

  3. Pingback: The dam is full – manage the sluices | The Vision of the Pension Plowman

  4. Pingback: DC Trustees – asleep at the wheel? | The Vision of the Pension Plowman

  5. Pingback: Light in the lifestyle tunnel! | The Vision of the Pension Plowman

  6. henry tapper says:

    George- it’s not just you- have a chat with Terry Smith at Fundsmith

  7. Pingback: Better ways to diversify the default. | The Vision of the Pension Plowman

  8. Pingback: DC4Good; ABdc and the Pension Trust get it. | The Vision of the Pension Plowman

Leave a Reply