Norbert Fullerton’s Chinese take-away

This article ‘s here because of an article on LCP’s website, written by Norbert Fullerton. He marvels at how the Chinese have consistently been better at table tennis than any other country over decades.

You can read the article here. Here is Norbert – in action.

Norbert is explaining that the way the Chinese measure how they are doing with their trillion pound sovereign wealth fund, is to set up a “reference portfolio” based on market returns expressed by indices and compare how their fund is doing. This is precisely what we should be doing in the UK, to tell ourselves – whether we manage others money or have others manage it for us, how things are going.

He concludes

In a world increasingly focused on short-term performance, market sentiment, geopolitics and portfolio diversification, the evolution of the reference portfolio approach to asset allocation for sovereign funds brings a breath of fresh air. Adopting a disciplined and consistent approach, like Chinese table tennis champions, can help sovereign investors manage risks better and make more informed investment decisions – enabling them to achieve (or exceed) their financial goals in the long run.

Reference portfolios can be used in precisely this way to measure how our investments are helping us towards our retirement planning goals. They can help us answer the key question “am I getting value for my money?” and it can help those who manage our money make sure we are.

Reference portfolios can tell us how we are really doing

The DWP wants to use a threshold test to measure value for money. The primary test is to be “net performance” but measuring what members get from a regular saving DC plan is problematic. It depends on using a DB measurement tool which takes no account of the timing and incidence of contributions, struggles to account for member charges and requires tortuous calculations to record returns from lifestyle defaults – especially when managers change.

The complexity of measuring performance is threatening to make VFM testing unworkable. Whatever value VFM tests bring, is undone when no-one can understand the working. The recent debates over Ofsted rankings are a good example of a measure that is undermined when people can’t understand the process behind it.

To put it politely, the recent consultation’s chapter (4) needs some innovative thinking and that’s what we are proposing. AgeWage has analysed over 7m DC pots using only contributions and NAVs to measure member IRRs. We use a reference portfolio to create a price track representing the unit price progression of a default fund since 1983. The early stages of the reference portfolio is created by fund returns provided by Morningstar, more recently we use proprietary and consultancy research on the asset allocations of workplace DC defaults.

By comparing actual with the reference portfolio returns we can create scores using an algorithm we’ve devised that takes account of dispersions of performance over time.

This is what would result. The first table shows an analysis of a master trust where over 40,000 member records were analyzed. The analysis took a matter of minutes to generate as it simply referenced the data held by the trustee’s administrator.

Table one

The second analysis was on a GPP set up for an employer using special terms negotiated at outset. As with the first example, the analysis is on what savers have actually achieved from their investment in a default fund.

In our view, using IRRs rather than constructing net performance tables by netting off assumed costs and charges from assumed performance is more accurate, cheaper and makes more sense to employers, trustees and even savers, making sense of the value they have got from their money.

The benchmark IRR returns are based on a “reference portfolio” used to the same purpose as discussed in Norbert’s recent article.

The advances in data analysis that make comparisons of reference portfolio outcomes to those achieved in real life, is currently largely ignored. I suspect that it will take a radical intervention from the FCA, TPR and DWP to move the conversation forward.

AgeWage has set out to establish this methodology at the heart of performance and VFM measurement and we will continue to use every opportunity to promote what we view as the true and fair way to tell DC savers how they have done.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Norbert Fullerton’s Chinese take-away

  1. byronmckeeby says:

    Reference portfolios are not a new idea, Henry. The PPF proposed one in a 2008 consultation on its future development.

    The asset allocation was matching gilts and leveraged index linked gilts for active and deferred DB pensions liabilities and 100% fixed income gilts for pensions in payment.

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