Hand drawing Value Price scale business concept with white marker on transparent wipe board on dark blue background. Big value, small price.

One of the things I agree with Torsten Bell is that the value we get from the investment of our money is not measured by the cost of the management but by the returns we get from the management.

Inevitably it is harder to deliver value if you are paying more for management than you might do otherwise, I would get more value out of my staff if I paid them less and they did the same quality of work. But I don’t think I would have a sustainable proposition for me, my shareholders and importantly, my customers.

Here is some discussion with an old friend who has become one of Britain’s foremost valuers of the cost we pay for investment services

This was discussed by Torsten Bell and it’s been a discussion on this blog before and since his speech on Tuesday.

I can only speak for myself on this as I am simply a consumer – I don’t have expertise.

What seems clear is that simply buying a share of a company or lending it money offers you certain rights, we know that those who have rights in Thames Water are to a degree deciding on the future of that utility and my guess is that it will either be managed in future with the help of corporate bondholders or – failing that – the Government (administration being the phrase used).

If as my friend points out , the management firm (he mentions Borders to Coast) is better at managing costs (in part negotiating fees) then I would hope they would be good at helping firms they invest in , get out of the kind of sewage Thames Water finds itself in.

What I’d be interested in from my manager (or in my case the pension fund) is the added value it can offer through ownership. This is particularly important where ownership might be a major stake in the business. When we think of the amount that is being committed by Nest in IVF we have to consider the capacity of Nest to improve the performance of the companies that IVF invests in.

If all Nest is doing is giving away control of our money in exchange for returns then I don’t think it is using its scale (it owns 10% of IVF and hence of IVF’s investments).

If Cushon, who co-invests with Nest was to come along with say £200m, I would not expect it to have the clout of Nest with its £10bn (invested in IVF).

Would I not expect People’s to invest its £33bn in a similar way? Would I not expect it to have more control and have resources to exercise beneficial control of the companies it chose to invest. I am pleased that People’s are ditching relationships with managers that don’t offer management of the style they like and I’d hope that their relationship with other  managers will be complimented in direct management. If there is not a capacity to take on challenging “high-risk” work, then why are we paying top quality consultants and insurance fund managers to give up their job and work at People’s?

To me, Value for Money includes the costs paid (an indication that the management is financially responsible) but more the returns that are coming out the other end. Invest in Manchester United like Ratcliffe has and you take a “hands on” approach, that’s what I’d expect to see from LGPS or from Nest in a few years time when they own significant shares of company and maybe important lenders.

Torsten Bell’s point , which I agree with, is that the member of a pension scheme expects to have money produce decent returns and to have clarity about what “good and bad” mean. AgeWage has a sensible system that looks at what people are getting and compares their results with what the average investor would have got. We do this using data that is available. I would like to think that Torsten would like this as a member service.

But what we don’t do is to look under the bonnet to see how the engine is working , this requires expertise and just can’t be done thousand and thousand times. What we need to do is to consolidate all the managers into a few and for far more detailed work to be done on these few large investors. It doesn’t mean that savers can’t get meritorious info by way of a score to tell them what they have got in the past, it informs them of what they can do in future.

I would like to think that people will take a view on how their money’s managed on the kind of investment they get from their pension going forward and compare this with the management of what they have from the past. This could mean consolidation , or it could mean another choice, but right now no one of us (but for a very few) know anything about the value for money we are getting from our investment.

I don’t think that ordinary people like me can vote for who invests our LGPS investments but I think they can expect them to have been selected as the best. It is not so important if you have a statutory right to your pension! But VFM is massively important to savers in DC pensions where the pension in future will depend on the outcomes we get on investments made by L&G, Nest, People, Lifesight and others.. It is also important to these firms that they are held accountable for their management. Ultimately we want to know that not only we get good results but that the companies we invested into were run well and that society profited from their activities.

I think that scale makes it possible for good managers to do good things with our money in a way that small investment managers can’t. For pension funds where money will increasingly be managed internally, the quality of the management is more complicated than the fees.