Bim’s speech yesterday lunchtime was so widely reported in the trade press yesterday morning, I’m surprised anyone bothered turning up. You can watch him here
Bim Afolami wants a “capital renaissance” so that capital locked up in our pension schemes refreshes the rusty London stock market and British industry can plan ahead in the sure knowledge that pension money is coming its way.
His strategy is pretty simple. He talks to the market and warms up his plan. He points out that while the number of people owning shares directly has fallen by 15% in recent times, 6 million of us have decided to invest in some form of crypto. He sees the appetite for private investment as unabated, it just isn’t for British stock ( at present).
He has a number of initiatives, PISCES sounding the most interesting, though work on prospectus’ and settlement times sound the kind of things a clued up finance minister should be doing.
But Bim’s angst is principally focussed on pension schemes – especially DC pension schemes, as lagging competitors in investing in private assets. He cites the Australian Supers which invest ten times the amount of British peers, in private equity and infrastructure. Ironically, much of this investment is in UK companies.
He is not alone. Charles Morgan of the British Bank has been saying much the same to City AM
His remedy is to get pension schemes to disclose its exposure to UK equities and private markets. Many will be considering higher allocations to home markets independently of this “threat”.
Yesterday , the flagship FTSE 100 touched a record 8,474, over the past 3 months it’s even outperformed the S&P 500.
Maybe some pension schemes will see the 9.5% year on year rise in the FTSE 100 as the sign of things to come. Maybe investment through this index will bring its own reward.
But we do not seem to be helping ourselves, the vast weight of UK pension assets are invested in gilts (DB), Corporate Bonds (annuities) and global equities (DC). What can a Government do to make investing in Britain through British listed companies easier?
One suggestion , which I know he is aware of, as Ros Altmann laid it out at a (not so) recent meeting I was at, is that the Treasury lean into the FCA to get the disclosures made by investment companies quoted on the FTSE 250 reasonable.
At the moment , they have to make cost disclosures which overcount the costs of investment making direct investment into investment trusts unattractive. Not only are the disclosures fundamentally wrong , but they are thought to have much to do with the deep discounts at which investment trusts are trading. They are a hangover from European dictats on Mifid and the rules on disclosures need immediate reform.
Ironically it is in the FTSE 250 companies, albeit wrapped within investment trusts, that capital is most needed. Though it too is up nearly 8% over the past year, the index continues to lag the FTSE 100 , the S&P 500 – up over 25% last year and the Nasdaq over 35%. Though there be some signs that companies may consider floating on the London Stock Exchange, the evidence over the last few years is that America is more attractive.
Bim’s angst, liberally delivered in Angel Court yesterday, could better be turned upon his own regulators who seem unable to win the hearts and minds of investors or founders of the companies that he hopes will make Britain great again.
It’s well worth watching this shorter video too.
Politically directed investment for pension funds, really!!
From memory the FT100 was at 6900 at the turn of the century?
I make that 0.8598% compound growth in the index over 24 years
RPI over the same period has gone from 166.6 to 383 or 3.53% compound
Annualised RPI currently stands at 4.1%
Dividends help but hardly a compelling argument
However we are taught to chant that that past performance is not a guide to the future, we are not told what is a good guide.
How do you determine VFM ?
The greatest of all dangers is politically motivated investment – but that is what we have now, with TPR coercion to purchase Govt gilts, serving as a very useful servant for the DMO. We need TPR to step away from investment guidance, and focus on data and admin, and let the market (of pension scheme investors) invest based on the balance of risk and award.
Bim’s well intended, indeed existential, aspirations will come to nothing without a fundamental re-focussing of what TPR does. It has strangled the life out of UK DB (ie dignified pensions for working people after a life of service) and in the process it has dis-invested the UK economy under the false god of “de-risking”. Do we really feel less risk now in our DB pensions and our economic outcomes (newsflash – they’re correlated, not de-coupled).
5 large insurers now control £250bn of pensions, and this is set to increase significantly. The profit extraction will be circa 20% of that going to insurers, money that should more properly be cycled into members’ benefits or back to the sponsors to invest or distribute. Its only the fear of Regulatory overreach that provides any rationale for the economic suicide of de-risking.
Also, as I understand it there is now c£800bn of leveraged supported synthetic gilts {one for Con Keating?) pulling out a 5% p.a. rent – so circa £40bn per annum, more I’d think than the actual pensions payable. Have we learned nothing from the LDI debacle. I guess we have learned that the ‘industry’ will continue to find ingenious ways to skim away at members benefits and pension funds.
And don’t mention cash flow requirements or Credit Suisse, SVB, FTX or Home REIT.
FTSE has produced a total return of 4.1% per annum since the turn of the century with dividends reinvested, compared to 5.7% and 8.1% in sterling from European and US stock market indices respectively. Not great, I agree, but it seems to match your average RPI increase, John?
Having hit new index highs so far in 2024, the FTSE 100, for example, might have wider appeal to some investors, including accumulators of income, given a prospective dividend yield of 3.8% for 2024 (and 4.1% for 2025), again figures which seem at least to match the prevailing rates of UK inflation.
Compare and consider net redemption yields on UK gilts.
May I suggest rather than backward-looking at market returns, a better “guide” may be prospective income if invested sensibly and attempting to avoid at least some historically overpriced securities?
But I forgot to mention taxes and investment costs!
Dividend taxation is an issue unless held in a SIPP or ISA, and gilts income is similarly taxable. Capital gains taxation, however, favours gilts.
I would hope that the first hurdle to achieve is the preservation if buying power.
Then surely the return on capital should give a profit.
It seems that only around 10% of the funds match the index. If the London market is to be brought in to replace the “kindness of friends” that does not look healthy for total returns.
We all need to remember this is not a closed system, or a case of arithmetic reversion. Our scale (we, the DB schemes) are of such mass that our actions can drive either of economic growth or (TPR induced) malaise. By accepting 0.5% (or worse!) yield on gilts we set the expectation so low, that we drove corporates into thinking that was an acceptable level of return (so G+2%, say, on a0.5% base) – if we set expectations so low, we might just make them.
Our job as “investors” should be to set yield and return hurdle rates to deliver acceptable returns, driving market efficiency and returns. By investing and managing we can influence our own futures.
The current approach of passive buy and hold at any price is not driving growth. But investing is hard work, and that’s why the consultant investors prefer to be measured on scale not returns.
Surely the duty of pension schemes is to get the best return for the pensioners. I’m not sure what our political betters are looking at. The US has been outperforming the UK every time I’ve taken a look. That being the case I want my pension to be invested globally and I want the government to keep its hands off my money.