UK pension funds ‘turn gold into lead #UKPensionNews #ReasonForQROPS #IN
31 Thursday Oct 2013
Analysis by an investment manager at Evercore Pan-Asset, of the 14 asset classes and sectors most favoured by UK pension funds, found the median passive fund outperformed the median actively managed fund in 13 of them over the past five years. Only managers of commodity funds earned their corn.
The average gulf between passive and active was 6.5 percentage points over five years, far greater than the difference in fees alone, which averaged 60 basis points a year for active funds and 20bp for passive.
“That’s quite a big difference,” said the institutional director at Evercore Pan-Asset. “It’s partly [due to] higher fees for active funds but also poor stock selection.
“It could also be that [active managers] are trading frequently and increasing their costs,” he added. Market capitalisation-weighted passive funds generally have very low trading costs.
The UK’s defined benefit pension fund industry managed £1.28tn at the end of 2012, according to the Investment Management Association. Fifty-six per cent of this was invested in actively managed funds, of which 65 per cent, or £465bn, was invested in single-asset strategies.
Factoring in the asset mix of the typical DB pension fund, based on data from the Pension Protection Fund, this suggests that the industry could save £6.2bn a year by switching this money to passive vehicles. Similar savings are likely to be possible in other countries with large pension industries, such as the US and the Netherlands.
The exposé comes in the week that the UK’s Prince Charles criticised the pension industry for “becoming increasingly unfit for purpose” and potentially condemning future generations to an “exceptionally miserable future”. Lord Myners, the former City minister, also accused the industry of “turning gold into lead”.
He concluded that pension funds should only use active managers for illiquid asset classes such as hedge funds and private equity, where few passive options exist. This would free trustees from having to select and monitor active equity and bond managers.
“Far too much effort is put into the process of manager selection. [This approach] would take all that time and energy away from an area of governance that does not reward you so you can focus on asset allocation, which is all that matters for most schemes,” he said.
Andrew Clare, professor of asset management at London’s Cass Business School, agreed trustees needed to “spend more time thinking about the big picture rather than whether their UK equity fund manager has underperformed”.
Prof Clare, who is a pension trustee, also backed passive investment in developed world equity markets and government bonds, where “it seems to be very hard” for fund managers to beat the benchmark.
However he said it would be “insane” to invest passively in areas such as high-yield bonds, given the significant risk of default.
“For corporate bonds the indices are weighted towards the biggest debtors, which does not seem to me a smart investment strategy. Having active credit analysis is probably a good thing.”
Managing director of AllenbridgeEpic Investment Advisers, which advises pension funds with £44bn of assets, said there was a place for passive investment, but there were signs that active managers given the freedom to switch between asset classes could provide strong returns.
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