Let’s not pretend that as retail investors , we know what we’re doing when we’re playing with unicorns!
We want to hand the job of investing in “unicorn”stocks not yet on our public markets to specialists. Meanwhile we want to be benefiting from the kind of returns that have been achieved from the privately quoted assets that investment trusts and ETF/LTAFs
The only problem is that some young unicorns fail to progress. As Steve Johnson points out in this Easter’s Financial Times
Among the successes have been Baillie Gifford’s investments in SpaceX, Anthropic and ByteDance. There have been failures, though, such as a holding in Northvolt, which was written down to zero when the Swedish battery maker went bankrupt last year.
It is the investment trusts , such as those run by Baillie Gifford that have been playing
Several currently hold SpaceX stock at a valuation of $800bn — less than half the $1.75tn the company is believed to be targeting for a putative June flotation, although there is no guarantee this will be achieved.
LTAFs have been chosen by the Government for retail investors while investment trusts have been restricted from competing in workplace pensions ( a fight that Altmann, Bowles and co have been waging in the House of Lords so that workplace pensions can use investment companies/trusts).
Here’s Hargreaves’ take on LTAFs
For a long time, private investments like private equity, private debt, infrastructure, and real estate, were mostly reserved for big players like pension funds and large institutions.
But in 2021 this changed when the UK’s financial regulator, the Financial Conduct Authority (FCA), introduced a new type of fund – the Long-Term Asset Fund (LTAF).
Steve Johnson asks whether there is appetite for the losses created by unicorns going wrong. We still remember what went wrong with Neil Woodford’s funds. There are now problems with Exchange Traded Funds (ETF’s) in the United States (Blue Owl being the obvious example).
Since investment trusts are closed-ended, analysts say they are reasonably well suited to holding typically illiquid private assets, which can be difficult to sell in a hurry.
Although in theory Europe’s Ucits mutual and exchange traded funds can hold up to 10 per cent of their portfolio in private companies, very few do because daily dealing creates valuation and liquidity problems if redemptions surge.
For me the answer to the question posed in this question is that retail investors and even those investing through workplace pension pots are not going to get involved with unicorns.
The need for liquidity makes retail investors unsuited for the kind of investments Morningstar’s Global Unicorn Index tracks. But the investment horizons of collective pensions are different, they do not need the same liquidity and can tough out failures such Northvolt or (closer to home) Thames Water.
If Pension Funds are run on an institutional basis by investment managers like Baillie Gifford and Aberdeen , I am comfortable. But if the format is the LTAF aimed at retail investors, I don’t want my pension fund invested in them.
Being a simple fellow, I want to have my pension invested for the long-term in assets which will grow best over time. I am happy to invest in unicorns but in a way that protects me.
I was with the union view until I read the part that says “The Office for Budget Responsibility has been clear that public sector pensions are not a risk to our fiscal sustainability …”
A personal view, but I feel that OBR assertion is too complacent and likely wrong in the longer run, because it confuses “not an immediate cash crisis” with “no fiscal risk”.
The OBR’s recent sustainability analysis points to long-term pressures from state pensions, ageing, and the triple lock that can materially worsen the public finances.
Public sector pensions are often described as “manageable” only because many are unfunded and spread across future tax receipts rather than showing up as a short-term and/or medium-term market funding problem.
That does not make them irrelevant to fiscal sustainability; it just means the obligation cost impact is delayed, not eliminated.
The OBR’s statement seems to imply a binary distinction between “risk” and “not a risk,” when the real issues are one of degree and timing.
Even if public sector schemes are not the dominant near-term threat, they still add to longer-run spending commitments in central and local government budgets already under pressure from demographics, health costs, and debt servicing.
In a high-debt, ageing society like ours, “manageable for now” is not the same as “no sustainability risk”.
The Prospect Pension Officer’s private view
Neil Walsh (at roughly the same time)
(Just to start off by declaring an interest – I’m Prospect’s Pension Officer.)
The wording could perhaps be a bit clearer – the OBR didn’t assert that these schemes were not a fiscal risk. That was our interpretation of the OBR’s forecasts showing that they were projected to cost much less in the future (as a percentage of GDP) than they do today.
Maybe something like “The OBR is clear that the cost of these schemes is projected to become increasingly affordable over time, so they do not represent a risk to our fiscal sustainability.” would have been even tighter / clearer.
But I don’t think either way if putting it is wrong.
Lord Davies of Brixton’s space to respond
Bryn Davies
A third view is needed , that of Bryn Davies, the peer whose thinking has guided unions for fifty years now
We have heard him speak in Pension PlayPen coffee mornings for the need to respect the decisions that have been taken and enacted and that to unwind what has been resolved would be needlessly costly with no surety of impovement.
We have a system of deferred pay that works for public sector workers and though it is at a cost, we could lose much more than the notional gains. That’s what I’ve taken from the great man’s views but I invite him to comment and whatever he comments will replace or amend my views.