The VFM podcast is again a discussion between the boys about legislation and in particular the comments of the Pensions Regulator on value for money delivered by DC savings plans that aren’t up to scale. Can being considered “VFM” give sub £25bn schemes grace to stay un-consolidated?
It’s rather like the arguments that Kensington’s LGPS fund has been making the same point when being shoe-horned into an LGPS pool. Sometimes small schemes can win the performance stakes by sticking with passive indexed funds (as Kensington’s funds have been managed).
This of course is a problem with a value for money measure that simply picks up on performance, there will be periods that the fancy work of the likes of Nest (DC) or Border to Coast (LGPS) can be ridiculed by those who pile money into American’s Magnificent seven (Kensington’s LGPS section).
I’m sure that’s not what TPR mean to promote sub scale DC funds but it’s what small DC schemes can do if they take no positions with UK stocks and avoid the Mansion House Accord’s commitment to private funds.
This is exactly the risk that performance measured over a relatively short term throws up.
Although the blog continues for a further 40 minutes, it’s made it’s excellent point in the first five (if you discount the football chat). If you start allowing small schemes to justify themselves by VFM measurement, then we are not going to get consolidation , just continuing sub-scale DC savings schemes.
I enjoyed this gossipy discussion of politics that included rehearsal of the mandate saga (which we’re told will be overturned if Conservatives get to be in power after the next election). Stranger things have happened than of a washed out party turning things around, but not many. In the past, Nico has professed himself a supporter of the Green party. I would have thought they’d have better chance of being in power, in which case Nico can advise the Greens or perhaps become a pensions minister.
Another reason for enjoying it was that it only lasted 54 minutes (being truncated by a fire alarm in Nico’s office).
I cannot remember too much of the discussion but it seemed to revolve around the work of multi-asset managers of which BoNY has two (Newton and Insight). Apparently there’s some jeopardy running a multi-asset management fund that invests in the UK and in private funds as it could go wrong and lose the fund manager its reputation and possibly a lot of money in compensation.
Chief of Investment Options get paid a lot of money and I think for all that money they should take on some risk. Frankly , if you f@ck up a multi-asset fund then losing your job should be the least of your worries.
This is of course many miles away from what ordinary people are concerned about. But if you listened to Martin Lewis in his last week’s pension special, you’d realise Martin or any of his questioners really don’t give a damn for these niceties.
Investing passively using ultra-low cost global index funds is the easiest way possible for an asset manager to deliver satisfying very-long term performance vs. an asset manager making active management decisions. Given a long enough time horizon, such as the 45 years someone may be saving for their retirement, the probability of outperformance from passive vs. active management becomes extraordinarily high.
Those making active allocation decisions are competing in a less-than-zero sum game against other active investors – the ‘less-than-zero’ nature arising from the various and material increased costs of active management, which compound over time to become an almost insurmountable hurdle over very long time frames, such as a worker’s accumulation phase.
Asset managers taking this prudent route to probable outperformance should be celebrated, not vilified. By their actions, they’re maximising the probability of delivering pleasing returns for those whose money they are custodians of. This is exactly what ‘ordinary people’ should be and are concerned about, evidenced by ordinary people themselves increasingly choosing to invest using global passive index-based funds instead of expensive actively managed funds that line the pockets of managers at the investor’s expense.
Thanks for the reply CH, where do these indexed funds end up investing the money? If we could all invest in these funds and get higher returns over time then who would lose? My experience that people do not chose to lose nor fiduciaries,
I’m sure you must know the answer to this – indexed funds simply invest in all of the securities comprising the underlying index, with money allocated proportionally to the size of each index constituent (eg. for equities, proportional to market capitalisation).
The return you achieve from investing in an index fund is the return of the index, less the fees for tracking that index, which are extremely low as it can be highly automated.
In this way, everyone — bar a small handful of active investors ensuring that price discovery still occurs — CAN achieve the so-called ‘Market Return’.
Due to the very low fees involved, achieving the Market Return over the very long term ,such as someone’s lifetime accumulation phase (45 years?), means that the index investor’s returns will exceed those of nearly every single active investor because those active investors will all have suffered the performance drag from 45 years of compounding active management fees…
You ask who would lose? The people who lose in this model are clearly the active fund management industry. Instead of these money managers annually confiscating a material chunk of an investor’s returns to pay for their Ferraris, that money remains within the investor’s portfolio. It’s the compounding of this fee impact over decades that transforms the results between the two approaches.
Investing in an ultra-low cost, globally-diversified, index-based portfolio — ideally one as near to the Capital Asset Pricing Model’s theoretical Market Portfolio as possible — is the simplest and most certain way to achieve very satisfying long term investment returns. This is now very widely understood, and has been for quite some time, despite pushback from self-interested money managers who obviously have a different agenda!