Investing for the long-term needs care

I am often surprised  by the insights of “Pension Oldie” , one of this blog’s most prolific and positive commentators. This week, in response to my blog on private market funds yesterday, I got this reply which surely gets to the bottom of one of the key questions.

I wonder what size of pension scheme can invest in private markets outside of a pooled fund arrangement.  Even the large Canadian pension funds investing in UK assets do so through multiple pooled funds (both evergreen and closed end to my knowledge and possibly ETFs).

The pension scheme is therefore effectively choosing the investment manager rather than the underlying investments – in many cases the manager will be incentivised by performance related rewards, based on their valuation of the underlying assets.  The managers are therefore encouraged to invest in underlying assets that offer the greatest short-term prospects, either in interest or dividend payments or the prospect of an early IPO.

The whole life pension scheme and the Government should be interested in investments that may not provide particularly strong early prospects but will support the pension scheme with income or redemption proceeds in 20 or 30 years time from this part of its portfolio. (my bold)

I take these comments as applying equally whether the risk is being taken by the saver (DC) or by the sponsor (DB).

Herein difficult questions on value for money , happily being addressed it would seem by the Government (if Corporate Adviser’s report on yesterday’s conference can translate into action)

If Government is to encourage a long-term approach to delivering value, then there has to be patience about the sleeve of assets committed to productive finance.

If Trustees are serious about the outcomes of their investments, especially where risk is being borne by savers, they must have mind for the investment principles that drive the composition of the underlying funds as well as the prospects for near-term returns. I think that there is an underlying conflict here which will be very hard to manage.

The good news is that the private sleeve of a DC fund is unlikely to be more than 20% of the default fund and this problem will influence but not determine the VFM assessment. But schemes investing for the long term in private assets , must accept that early door valuations are likely to be depressed because what is called the J-curve. As the letter suggests, fund values may fall behind in the early years until success is proven and during these early years , private asset funds are likely to be a drag on net performance.

To schemes declaring VFM using marked to market valuations, that means that high allocations to the preferred private market funds could imperil  the VFM of the scheme as a whole. I take it that DWP are alive to this problem.

This statement , reported in Corporate Adviser is encouraging