Plus ca change

History is littered with great events that could have changed the world and didn’t. I’ve been listening to Laura Kuenssberg’s retrospective of her 7 years as BBC’s political correspondent. Corbyn , Cameron, May. Johnson- Brexit, Covid and a host of lesser political upheavals, all of which have changed things not as much as we might have believed at the time. Nigel Farage has the final word, pointing out that in his attempt to fundamentally disrupt the British political process, he failed. Things are much as they were 20 years ago, he cites the Spring Statement as something that could equally have been delivered by Rachel Reeve.

At which point , I will play my “industry veteran” card and point out that change is seldom as radical as we think and that the “set and go” strategies that sit behind 60/40 portfolios make broadly as much sense today as they did 20 years ago.

This is a direct change to a school of thought that would have us moving from one new normal to another new normal at regular intervals, re-evaluating and transitioning along the way.

What triggered this was a post by LCP’s Dan Mikulskis, challenging the old normal. Dan, with an effusion of goodwill over my truculence, explains that the article was “just saying”.

The article was a comparison of portfolios & returns at two points in time , not a statement of who invested in what when (don’t let that stop you knocking it for that though 😁). Idea was a different take on a familiar theme (lower future returns) might provoke more debate which has certainly been the case!

Key point is that we have an industry built around the idea that particular portfolios will deliver good outcomes , but this can change , yet the industry is anchored.

But I know that we are never “just saying” but always including our own bias’ which is pro rather than against change. “Set and go” has been heresy for a long time – amongst consultants – and it’s not hard to see why. The predilection to reset should be called “consultancy bias”

There are of course things that do need changing. We really do have an existential threat from climate change and we must ensure that within the strategy we set for the management of our or other people’s money, we ensure that we invest with an eye to reducing emissions. Similarly, if we can invest in a way that makes for peace rather than despotism or encourages people to build a better society, we should do so. It is clear to me that these aims have become more focussed over the past 20 years as shareholder democracy increases.

Consultants have an important role to play in delivering improved ESG.

But delivering improved ESG, vital as that is, is not the strategic aim of a pension scheme –  which is of course to pay pensions. We have got as far as defining the pensions payable under the old system , but the ambition of those who manage DC schemes is no more than make available a sum of money to meet retirement needs. It doesn’t matter in the big picture, we are all looking for the investment sweet spot that comes from the massive time horizons of pension schemes.

In Jennifer Davison’s article, which Dan was promoting, there is a mention of the set and go strategy of DC lifestyle – which has prevailed over the past 25 years. It simply says take risk while you can and reduce risk when you can’t. There may be some local adjustments about the risk people are taking towards the end of their savings career, but the fundamental approach to DC default management has hardly changed  since I started saving for my retirement in 1983. The only change I made to my investment strategy in the past 39 years, is to ditch the de-risking of my savings into bonds ( I don’t have a “closed scheme problem”).

The good news is that the vast majority of people who have been saving into DC plans, have done so without regard to the normal or new normal or indeed the new new normal. They have simply ploughed on with their “set and go” strategies, changing things only to combine pots into the pot that has lower charges. In adopting this simple way of going about things, most people have not had to pay advisory costs and have kept their platform fees to a minimum.

This lump of money, that sits in trusts or insurance contracts, is essentially non-advised and represents the majority of the nation’s private wealth. It is a silent majority but it’s returns speak for themselves.

Attempting to disrupt the continuity of the past are the advocates of a brave new normal, typically these people have their own agenda, I cite the example below.

the new normal is usually linked to some new way to extract fees from the silent majority

The new normal?

As Nigel Farage pointed out, the old normal has a habit of reasserting itself over time. The resilience of markets is matched by the resilience of savers who ride out the numerous market crashes and carry on regardless.

Investment consultants fret that their assumptions need radical adjustment for whatever reason, but they miss the wisdom behind those set and go strategies, that the market has an irresistible force which means our strategies “revert to mean” over time.

This is of course where the needs of the saver and those of the adviser diverge. Whether we class the endgame as the purchase of a pension or the  payment of a lump sum, long-term investment into pensions is about building up as much money as possible. This is an immutable truth.

It is not just the “industry” that is anchored”, savers are anchored too. They are anchored to some fundamental principles – an investment philosophy – that doesn’t change over time. The “contractual accrual rate” which Dr Keating uses when talking of the long-term return pension funds can expect on their money, has remained at around 6% for many decades. The means of achieving this haven’t changed much either. We may look at market movements on a daily basis , but that is a futile task. I have been saving for nearly forty years and I hope my savings will be spent over the next forty years, over those forty years I expect there to be at least ten declared “new normals”, but I don’t expect the fundamentals to change much, I have no intention of changing my investments from the set and go strategy chosen for me 40 years ago!

I am resilient and will not follow the bear to a new normal. I am not for de-risking my portfolio for a prospect of lower returns.

The new normal is usually an incarnation of “project fear”