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
- Can a hedge fund make your money prosper? (henrytapper.com)
- John Paulson is no longer the man with the Midas touch (guardian.co.uk)