No, really, Milipede wants to abolish ethical investing


Of course, what\’s he\’s said is a mistake. But a mistake because he doesn\’t understand what he\’s saying.

19 thoughts on “No, really, Milipede wants to abolish ethical investing”

  1. 1. ‘Of course he didn’t mean just dividend return, you have to include capital growth as well’
    2. ‘we would make sure that pensions can only be invested in UK Co’s.’
    3. ‘Reform of the pension industry is long over due, Labour will invest in reform of the industry to ensure the best return to pensioner with absolute safety’
    4. Fill in your own suggestions here…

  2. And if he wants investment funds to maximise returns then I presume he is happy for fund managers to short shares they think over priced.

  3. A duty to maximize returns is pretty well meaningless – no one knows what investments will give the best returns. A duty to maximize expected returns is slightly meaningful, but according to risk aversion theory it would imply maximizing the non-diversifiable riskiness of the portfolio, which I suppose is not what Miliband wants. I think it fairly safe to assume that the proposal should be understood in the context of the surrounding material, which is all about reducing pension fund management fees. So I guess that what it actually means is a duty to minimize fees.

  4. So I guess that what it actually means is a duty to minimize fees.

    Well, minimisation is easy. The minimum fee is 0. So, they’ll have to earn money some other, less transparent and possibly dodgy, way. Hmmm.

    Clearly well thought through, then. Anyone seeing the “Hand of Ritchie” in here somewhere?

  5. Surreptitious Evil – it looks like the first evidence I’ve seen he’s settling in to his role as Chief Economic Advisor prior to the 2015 government…

  6. Brian, follower of Deornoth

    My private pension was bowling along quite adequately until it was looted and plundered by…er…let me think…er…the Kirkcaldy Pederast. So now it is mandatory to have an occupation pension scheme, and the Kirkcaldy Pederasts’s slimy little sidekick has decided that the pension scheme must “maximise returns”. Which in the lexicon of any sane person means “somewhere the slithering filth Millipede can’t steal it.”

    Although that may not be quite the impression he intended to convey.

  7. You can only maximise returns by investing 100% in the single best-performing investment with 50:50 hindsight. Usually that is an each-way bet on the outsider that comes second or third in the Grand National or the Cheltenham Gold Cup!
    Ed Millionaireband’s bright idea would require revoking all the regulations currently in force to try to protect members of pension funds that cost employers higher contributions by reducing the riskiness of investments and the standard requirement for investment managers to take account of the “risk preference” of their clients.
    @ PaulB
    The difference between performance between different funds is often greater than the *total* fees charged by the better fund so it cannot just be about minimising fees.

  8. Brian, grow up. Brown’s pension reforms? Maybe good, maybe bad. I don’t know. But your pension was screwed (if indeed it was) by Lehman etc. (ps, if you were sensible and held a reasonable proportion in gilts, you would have done OK, not great, but OK. 20/30% gains on your gilts, but you chose to be a chancer).

  9. @ Luke
    You obviously do not understand what you are talking about. Pensions would have lost their tax benefits if they had a surplus of assets over liabilities of more than 10%. The majority (about two-thirds on average) of their assets were invested in equities. Brown cut the *value* (which is not the same as price) of equities to pension funds by 20%. So pension funds in aggregate, and in most individual cases were pushed into deficit by Brown.
    Elementary lesson – pensionm funds need not care about the market price of investments unless they are buying or selling them. What matters is the flow of dividends and other income in future when they need to pay pensions that excveed the flow of contributions (at that future date). So a fall in market prices when Lehman collapsed was *irrelevant*. Lehman didn’t screw any UK pension scheme unless it had a massive cash outflow in 2008. Also Brown’s “windfall tax” on utilities involved confiscating a chunk of value of companies in which pension funds were major investors so that probably was more detrimental to UK pension funds than the collapse of Lehman.

  10. John77 @ 9. You’re right, I have no knowledge of pensions save as an investor whose personal investments, largely in index funds, have massively outperformed those made on my behalf by the experts of the pension industry.

    But insofar as I understand your point, it is that all problems with UK pensions could be solved if actuaries, rather than markets, could decide what share are worth. Are you boldly going against the point of this blog that markets (if not always right) should at least be given a good hearing?

  11. John 77 @ 7 “The difference between performance between different funds is often greater than the *total* fees charged by the better fund so it cannot just be about minimising fees.”

    Yes, fees doesn’t explain everything. Sheer dumb luck explains a lot, indeed most outperformance.

  12. @ Luke
    Kindly engage brain before opening mouth.
    You have completely ignored what I said. Actuaries may (and often do) calculate the present value of future cash flows but they do not create those cash flows.
    For those with IQs roughly equal to their shoe size: Pension Funds exist to pay out money in the future to those who have retired from work. To do this they take money now from these people and/or their employers and invest it to earn future cash flows. Brown reduced the value of the future cash flows by more than the maximum margin permitted by the Inland Revenue to Pension Funds. So they have a deficit.
    Actuaries merely calculate and advise pension funds how to best achieve their objectives within the rules – they do not make the rules.
    With regard to your snark: I am assume that your index funds were in equities: pension funds used to invest mostly in equities but the FSA (created by Brown, coincidentally) demanded that they reduce their weighting in equities after the equity market slumped switching from equities yielding 6% with potential for capital growth into gilts yielding 3%. OK your experts should have used a crystal ball to anticipate political interference but this does nothing to exculpate Brown.
    Sheer dumb luck does explain some things but it does *not* explain most long-term outperformance: it is pretty difficult to explain Warren Buffet or Anthony Bolton or Bob Yerbury as sheer dumb luck. J M Keynes famously stated that markets could remain irrational longer that you can stay solvent some time after he had to be bailed on a foreign holiday with pals when his playing the Forex market, but they don’t stay irrational for twenty or thirty years. Does sheer dumb luck explain Usain Bolt and David Beckham and Seb Coe and Muhammed Ali?

  13. I might add that forty years ago I was arguing that Actuaries should not assume that they knew what shares were worth, but should accept market prices. This did not, at the time,enhance my popularity.
    New Labour has sought to use Actuaries as a whipping boy by claiming that they failed to allow for improvements in longevity – but they have done so throughout my memory. Every actuarial table published for more than 60 years has allowed for improving death rates. As I have said previously Methusaleh could have bought an annuity in 1997 for less than it cost for a Tesco check-out operator in 2010.

  14. john77:

    The difference between performance between different funds is often greater than the *total* fees charged by the better fund so it cannot just be about minimising fees.

    Active funds typically underperform passive funds. Unless you’ve got a way to identify in advance which active funds are going to do well, paying high fees is giving money away.

  15. @ PaulB #14
    What matters is the after-tax return on the fund.
    Most active funds therefore are weighted towards shares that have higher after-tax returns and often have lower pre-tax returns. Forty years ago we measured after-tax returns but the Americans academics just look at pre-tax and the dominance of US banks in investment banking has resulted in pre-tax returns being the norm for comparison. This automatically biases the comparison against “growth” funds.
    Yes, there are quite a lot of underperforming funds because the fund management companies (excluding hedge funds) get most of their income from volume and relatively little from performance but in fact the data does *not* show passive funds outperforming. The data shows that, on average. active funds, after expenses, underperform the index, but passive funds, after expenses, underperform by more. The argument for passive funds seems to be based on ignoring their expenses .

  16. John 77 @ 15 .Open ended and closed ended funds in the UK do not pay CGT on disposal of shares, so pre/post tax returns will be the same. It it’s inside an ISA or a pension (and we started with pensions) there’s no income tax for higher earners, so again, pre/post tax returns will be the same. So tax isn’t the reason.

    As for your second para, I note that you do not actually point to any data. Index funds, I agree, must underperform the index because of costs.

    But active funds are the market – if one outperforms it, it can only be because it is overweight/underweight the “right” shares, while another fund is underweight/overweight the “wrong” shares. Not everyone can be above average.

    Paul and I are not knocking fund managers (well, not much). The better they are as a group, the harder it is to outperform.

  17. @ Luke ~16
    It may not have occurred to you but the people who have money to invest in risky equities and funds are likely to be those with enough spare cash left over after paying for “necessities” and/or a decent standard of living to be able to take risks with some of it. So most of them pay higher rate tax, some pay the additional rate (but a lot of additional rate taxpayers have a portfolio of shares rather than units in a fund). When looking at fund performance it is more reasonable to look at the net returns after expenses and tax to higher-rate taxpayer.
    The individual pays CGT (at 28% for a higher-rate taxpayer) on sale of units or shares in Investment trusts but until then capital gains roll up free of tax while dividend income or fund distributions are charged at 32.5%.
    The inequality is 0.72x(1+i)^n > (1+o.675i)^n for all positive values of n. The proverbial schoolboy can see that for a given pre-tax rate of return, capital growth-oriented investments provide a better after-tax return to higher-rate taxpayers.
    Of course there are also income-oriented funds that cater for those relying on the income from their savings and these have a different investment strategy – it comes as no surprise that their pre-tax returns are higher, on average, than the average for growth funds.
    Active funds are PART OF the market – there are also UK pension funds, UK insurance companies, more than ten million private individuals, and overseas investors (and, of course, the passive funds that you mentioned). Also those Investment Trusts and Unit Trusts/OEICs that invest in overseas markets cannot dominate the markets in which they invest. Therefore your third paragraph merely demonstrates your ignorance.
    Ignorance is excusable (except for those who have nominated themselves for a task where other people depend upon their knowing what they are doing) but being lectured by someone who clearly does not know what they are talking about gets irritating (at least you are not as bad as the American who told my wife today that Sherlock Holmes never said “Elementary”!).
    There are multiple databases – trustnet if you have the enthusiasm to wade through it covers all UK Investment Trusts, Unit Trusts and OEICs; I find Money Management’s printed page easier to read but I don’t have a copy to hand. If you want to check you can go into the Guildhall Library and read it.
    There is no point in a pension fund investing in a Unit Trust or OEIC unless it has expertise in an overseas market that the pension fund itself lacks. It costs less for any reasonable-sized fund to hire a handful of decent fund managers than to pay the fees out of which a Investment Management Company pays fund managers plus back office plus marketing department plus the intermediaries who actually sell their products. ISAs are still a fairly small minority of the total value of investments so fund managers would be in dereliction of duty if they neglected the interests of the large majority of clients to cater solely for the ISAs.

  18. Length of comment is not correlated to accuracy. Waffle, waffle, waffle. Just have a think, and stop confusing your self interest with maths. (And give a link to the “data”you keep referring to).

    Maybe spend more time on your investors’ affairs (if you have any)?

  19. John77, another thing. Can you let me know the funds in which you have an interest so I can avoid them? Thanks.

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