All that glitters does not lure – thoughts on DC default funds.

Cedar plug lure- deeply unexciting

Cedar plug lure- deeply unexciting

There’s oil and snake oil, cheese and ripe gorgonzola and there are shiny fishing lures.

In a fine article sent me by Alan Miller I read that its author, John West (coincidence) of Research Affiliates tells a story of an encounter with a fishing  tackle salesman who was  selling lures that bore little resemblance to fish.

“I  asked him, ‘My  God, they’re purple and green. Do fish really take these lures?’And he  said, ‘Mister, I don’t sell to fish.’

I won’t re-write John’s article – you can read it here. Here are his key insights

  • It adds to a consensus that long-term  returns from a balanced portfolio of bonds and cash are  unlikely to beat inflation by more than 4%
  • Promises of returns of 8% above inflation , based on past returns by US endowments (Yale and Harvard), are snake oil. The methods used are not available to retail investors today.
  • The means retail investors use to access Hedge Funds (fund of hedge funds) is so expensive, that its introduction damages rather than improves returns.

In summary , Research Affiliates conclude that funds of hedge funds may “hedge” but they don’t “return” and investors would be better off getting diversification from simpler multi-asset funds which diversify but at a fraction of the expense of fund of hedge funds.

To quote again from the article

Commodity futures, emerging market local currency  bonds, bank  loans, TIPS, high yield bonds, and REITs all have unique  return drivers and  will respond differently to various market  environments. Shouldn’t we employ  these in our asset allocation on a scale large enough to matter?

There is good news here for ordinary people. Several of the largest pension providers who we speak to , either have introduced or are planning to introduce funds that work in this way as the defaults for their workplace savings plans. In our new auto-enrolled , these funds will be employed on a scale large enough to matter.

The cost of these diversified funds are little more than their predecessors, the passive global equity funds that form the body of the lifestyle options that have been so popular over the past ten years.

This is evolution not revolution. The returns from the new breed of multi-asset funds will not shoot out the lights (they aren’t targeting 8% real) . Hopefully they will get equity like returns without the volatility of their pure equity predecessors and without the prohibitive pricing structures of fund of hedge funds.

These funds are, in short, neither snake oil, ripe cheese nor shiny lures. They are deeply dull.

If the providers of workplace pensions are prioritising DC outcomes over marketing advantage – good for them. We should start giving credit where credit is due.

The dynamic diversified strategies of NEST and NOW, Bluesky, SHPS , Pensions Trust, L&G, Aviva and Zurich to name but a few, all offer variations on the theme “low-cost diversified defaults that target good DC outcomes not marketing brochures”.

I’ll use John West’s conclusion

As  a fishing enthusiast growing up  in San Diego, I can tell you I caught  more tuna on as plain a lure as you will  ever find—the cedar plug.  Vaguely resembling an oblong torpedo with a single  hook, the cedar plug  has a lead head and a tail of unpainted cedar wood.  There’s no  fisheye, no silver and blue (let alone purple and green!), and no  paint  anywhere. Just dull lead and the rusty hew of cedar wood. If there  was  ever a lure that wouldn’t sell in the tackle store, this is it. And  yet it  produces

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to All that glitters does not lure – thoughts on DC default funds.

  1. George Kirrin says:

    Henry, a careful re-reading of Mr West’s article will show that long-term returns from
    a 60:40 balanced portfolio of equities and bonds (not bonds and cash, as you say) are unlikely to beat 4% (not inflation plus 4 as you suggest).

    Similarly, while past returns of US endowments have been 8% or more above inflation, a racier portfolio (by which Mr West seems to mean more equities) may achieve up to 8% pa in total (not inflation plus 8).

    Numbers not your strongest point? (Similarly, I think your Yeovil Town are in a play-off for promotion rather than a promotion place.)

  2. Pingback: An encouraging tale of choice | The Vision of the Pension Plowman

  3. Matthew Demwell says:


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