There has been a huge soft ride on US stocks these past few years based on the huge performance of a few technology stocks and a strong US Dollar. Before I call this over lets look at markets. Here is the principal index DC savers invest in. A 9.1% positive change in that market is not bad news , most investors would have taken it a year ago.
Now lets look at the much berated UK FTSE 100. It is only just positive, it is not the powerhouse that investors can flee to.
But what is good news is that the return we receive from the UK markets are in our currency, we are not making a second play in currency -specifically the dollar/sterling currency which is typically unhedged so we get the upside when the dollar is strong and the downside when it isn’t.
Sterling has performed well against the dollar – up 6% against the dollar making the returns on unhedged US indices such as S&P 500 bad news.
Actually most of the loss we’ve had on our DC pensions has been since the end of last year and the start of Donald Trump’s presidency. This kind of analysis is political, short-term and desperate.
This blog is about getting away from this pointless kind of analysis. We should focus on the long-term and not on what is happening in short term markets which we cannot control.
My analysis is correct and totally irrelevant at the same time. It is a wealth manager’s not a pension manager’s approach to “value for money”.
Focussing on what really matters – (which is not short term return)
Most of our workplace pension pots are invested in diversified pension pots are invested in unhedged US dominated global index funds which follow the mantra laid down by Swenson at the end of the last century that if you are not a Buffet or Smith or Swenson, stay stuck in super-diversified equity funds, that may have been the Yale formula but now it is the default fund for DC accumulation and people have done tremendously well from it.
We have been massive beneficiaries of US stock markets and a strong US Dollar and we are now fed up that these plays made on our behalf by the consensus of workplace pension markets look like they’re backing Trump!
I think it is time to ask ourselves the questions that matter. We are doing so, or at least the commander of all this is asking for us to rebase our DC default funds to have what is called a “home base”, eg greater investment in the UK than the weighting of the UK indices would offer us.
Like Swenson, Reeve is looking for the smart investors of our Yale type of funds to look for growth at home and in private markets which are currently being raped by private equity fund managers who are using hedge strategies to reward themselves and their overseas backers at the expense of our businesses.
Our approach to the Yale success has been to drive money into the hands of overseas investment in the name of diversification. Money has been in outflow from UK markets for the past 9 years and it goes for the ownership of UK private markets too,
I could name a few companies that are no longer UK owned or public and I weep. Here the return is measured by IRR over a short-term by accountants not investors.
I was on a train travelling West (a bit of a Donne move) yesterday when I read this remark complaining about Reeves call on pensions to invest long term in UK equity.
Making things “safer” to me is asking people to hedge out all risk and to stick the money under the mattress in the surety that cash will be there for the future. That mantra is not much good unless you’ve got to pay the drug dealer tomorrow.
It has always been folly to guarantee us long-term purchasing power by de-risking , there has to be what Reeves is calling for, speculation that growth will happen in the home market, for if we do not invest in our market we have no means for companies to pay us the wages and value goes to our overseas competitors.
There will come a time when Reform will wake up to this, for the moment Rachel Reeves has the common sense approach to herself. We need to invest in the UK in the long term because we live, work and save in the UK and tough as it might seem, we can not rely on global markets to pay our pension bills.
There was a time before Swenson when UK pensions made it worth listing great companies on the UK stock markets and private companies were proud to sport their UK ownership. That went west with the freebie culture of global diversification which has seen our top pension funds investing 2p in the £1 in UK equities (Nest).
Reform have a pride in the UK which is absent from pension funds in the UK but they speak for ordinary people and it will only be a short time till they wake up to the failure of pension schemes to make Britain Great Again.
I take my hat off to Rachel Reeves and her subaltern Torsten Bell and I am glad that there are a group of investors who are backing her up.
When I read Mark Davies’ comment in Linked in, I wrote from my train-seat the following comment. Sometimes you do things you shouldn’t commercially but because you know they have to be done.
I sat there wishing I hadn’t pressed send till this comment came from a friend
Sadly there are too few DB schemes that have stayed funded and open for a nation to be re-floated by them (Reeve and Bell have said as much) but we can do more with the trillions in closed DB funds and we can certainly do more to make out DC savings plans into workplace pensions. If we avoid consigning our DC savings to annuities (as we still can DB and DC schemes) mutuality can work.
If we move from freedom from pensions to CDC and Shared Ambition then we move our thinking from guarantees to best endeavours. We will move from wealth management to income generation, from individual ownership of a pot, to collective provision of pensions.
If we manage our pensions with an eye to the future and to growth , we help the country do the same. If we manage pensions to de-risk to insured certainty, we will certainly fail.
“While riding on a train goin’ west
I fell asleep for to take my rest
I dreamed a dream that made me sad
Concerning myself and the first few friends I had
With half-damp eyes, I stared to the room
Where my friends and I spent many an afternoon
Where we together weathered many a storm
Laughin’ and singin’ till the early hours of the morn…”
But Dylan’s later song, “Lay Lady Lay”, is thought by some to be a modern rendering of John Donne’s “To His Mistress Going to Bed”.
“Buying existing U.K. shares”
Is that really the answer? Backing new business by expanding EIS after 3 years with expansion phase 2 having proved concept, I.e. beyond start up pre IPO.
Remember Deep Mind was a U.K. start up sold to the US
Notes from a study group I belong to.
“The ‘middle income trap’ is a stage of economic development where a country grows fast at first (cheap labour, cheap exports), reaches middle-income levels, and then stalls — unable to compete with richer countries in innovation or with poorer countries in low-cost production.
East Asian countries (like South Korea, Taiwan, Singapore and Japan earlier) have been the clearest examples of escaping the middle-income trap.
China is at the threshold; it has moved from low to high added value output, but still has to make consumption the driving force of the economy. The shift to high added value justifies but does not guarantee higher wages in an authoritarian regime. Moreover, China has one of the highest saving ratios because of poor welfare (the Hukou system of health and pensions). The trade war will stiffen the resolve to make the final step, achieve autarky and insulate the economy from the volatility of world trade. Vietnam is the next one in line but the trade war will delay the transition.”
“escaping the middle-income trap is a prerequisite for joining the league of Advanced Economies (AE). Only East Asia has succeeded so far. This is due to sustained improvement in total factor productivity. Unless reversed, US isolationism will give East Asia the advantage of becoming the engine of world trade in the not-too distant future, thus helping the formation of a bipolar world.”
When on advice in mid 2000s we moved out of 100% FT All Share index tracking UK equities to 25% index tracking UK equities plus 75% index tracking equities in other markets (25% only in the U.S.) , I justified the move to myself on two grounds:
1. It increased diversification in our holdings.
2. In looking at our 70 year investment time horizon it was reducing our dependence on a future population dynamic limited UK economy both to pay both our scheme pensions and also to meet the debt interest payments and capital redemptions associated with our Gilt holdings.
When we moved to Global weighted index tracking (albeit two-thirds currency hedged), we found we no longer met our diversification targets with 27.5% of the index tracking just 7 companies (the “Magnificent” seven) whose transition from speculative growth to value stocks probably accounts for as much of the recent market movements as Donald Trump. This shows the irrelevance of current market values to pension scheme prospects unless you are forced to sell those investments within a short timeframe e.g. on the switch from accumulation to decumulation, or to purchase an insurance product (BPA or personal).
The second point however may still hold true and as John Mather points out above, some countries may be dealing with age related and other maturity issues better than others.
I think the key message is to always consider diversification to provide long term security.